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EX-32 - EX-32 - CalAmp Corp.camp-ex32_9.htm
EX-31.2 - EX-31.2 - CalAmp Corp.camp-ex312_8.htm
EX-31.1 - EX-31.1 - CalAmp Corp.camp-ex311_7.htm
EX-10.7 - EX-10.7 - CalAmp Corp.camp-ex107_59.htm
EX-10.6 - EX-10.6 - CalAmp Corp.camp-ex106_61.htm
EX-10.5 - EX-10.5 - CalAmp Corp.camp-ex105_175.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 May 31, 2020

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 June 22, 2020 was 34,364,533.

 


 

CALAMP CORP.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MAY 31, 2020

TABLE OF CONTENTS

 

 

 

 

 

Page

Number

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial statements

 

3

 

 

 

 

 

 

 

Condensed consolidated balance sheets (unaudited) as of May 31, 2020 and February 29, 2020

 

3

 

 

 

 

 

 

 

Condensed consolidated statements of comprehensive income (loss) (unaudited) for the three months ended May 31, 2020 and 2019

 

4

 

 

 

 

 

 

 

Condensed consolidated statements of cash flows (unaudited) for the three months ended May 31, 2020 and 2019

 

5

 

 

 

 

 

 

 

Condensed consolidated statements of stockholders’ equity (unaudited) for the three months ended May 31, 2020 and 2019

 

6

 

 

 

 

 

 

 

Notes to unaudited condensed consolidated financial statements

 

7

 

 

 

 

 

ITEM 2.

 

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

 

25

 

 

 

 

 

ITEM 3.

 

Quantitative and qualitative disclosures about market risk

 

31

 

 

 

 

 

ITEM 4.

 

Controls and procedures

 

31

 

 

 

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

ITEM 1.

 

Legal proceedings

 

32

 

 

 

 

 

ITEM 1A.

 

Risk factors

 

32

 

 

 

 

 

ITEM 6.

 

Exhibits

 

33

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CALAMP CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

May 31,

 

 

February 29,

 

Assets

 

2020

 

 

2020

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

104,071

 

 

$

107,404

 

Accounts receivable, net

 

 

66,997

 

 

 

72,273

 

Inventories

 

 

36,079

 

 

 

36,778

 

Prepaid expenses and other current assets

 

 

23,334

 

 

 

21,411

 

Total current assets

 

 

230,481

 

 

 

237,866

 

Property and equipment, net

 

 

54,150

 

 

 

55,878

 

Operating lease right-of-use assets

 

 

24,220

 

 

 

20,626

 

Deferred income tax assets

 

 

4,357

 

 

 

4,437

 

Goodwill

 

 

101,419

 

 

 

106,335

 

Other intangible assets, net

 

 

42,725

 

 

 

45,895

 

Other assets

 

 

22,894

 

 

 

24,768

 

 

 

$

480,246

 

 

$

495,805

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

5,490

 

 

$

33,119

 

Accounts payable

 

 

31,841

 

 

 

28,450

 

Accrued payroll and employee benefits

 

 

8,891

 

 

 

9,049

 

Deferred revenue

 

 

33,706

 

 

 

34,704

 

Other current liabilities

 

 

19,050

 

 

 

16,153

 

Total current liabilities

 

 

98,978

 

 

 

121,475

 

Long-term debt, net of current portion

 

 

198,120

 

 

 

177,088

 

Operating lease liabilities

 

 

25,692

 

 

 

24,279

 

Other non-current liabilities

 

 

32,262

 

 

 

35,044

 

Total liabilities

 

 

355,052

 

 

 

357,886

 

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; 34,362 and 34,322 shares

   issued and outstanding at May 31, 2020 and February 29, 2020, respectively

 

 

344

 

 

 

343

 

Additional paid-in capital

 

 

224,047

 

 

 

220,482

 

Accumulated deficit

 

 

(96,087

)

 

 

(81,531

)

Accumulated other comprehensive loss

 

 

(3,110

)

 

 

(1,375

)

Total stockholders' equity

 

 

125,194

 

 

 

137,919

 

 

 

$

480,246

 

 

$

495,805

 

 

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

 

 

 

May 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Products

 

$

53,106

 

 

$

65,763

 

Application subscriptions and other services

 

 

27,109

 

 

 

23,307

 

Total revenues

 

 

80,215

 

 

 

89,070

 

Cost of revenues:

 

 

 

 

 

 

 

 

Products

 

 

35,996

 

 

 

39,806

 

Application subscriptions and other services

 

 

13,166

 

 

 

13,853

 

Total cost of revenues

 

 

49,162

 

 

 

53,659

 

Gross profit

 

 

31,053

 

 

 

35,411

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

6,324

 

 

 

6,886

 

Selling and marketing

 

 

12,886

 

 

 

14,647

 

General and administrative

 

 

13,669

 

 

 

17,484

 

Intangible asset amortization

 

 

1,892

 

 

 

3,040

 

Restructuring

 

 

1,908

 

 

 

 

Impairment loss

 

 

4,289

 

 

 

 

Total operating expenses

 

 

40,968

 

 

 

42,057

 

Operating loss

 

 

(9,915

)

 

 

(6,646

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

Investment income

 

 

18

 

 

 

2,081

 

Interest expense

 

 

(4,077

)

 

 

(5,456

)

Other expense

 

 

(208

)

 

 

(399

)

Total non-operating expense

 

 

(4,267

)

 

 

(3,774

)

Loss before income taxes and equity in net loss of affiliate and related impairment loss

 

 

(14,182

)

 

 

(10,420

)

Income tax benefit (provision)

 

 

(240

)

 

 

2,257

 

Loss before equity in net loss of affiliate and related impairment loss

 

 

(14,422

)

 

 

(8,163

)

Equity in net loss of affiliate and related impairment loss

 

 

 

 

 

(530

)

Net loss

 

$

(14,422

)

 

$

(8,693

)

Loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.42

)

 

$

(0.26

)

Diluted

 

$

(0.42

)

 

$

(0.26

)

Shares used in computing loss per share:

 

 

 

 

 

 

 

 

Basic

 

 

34,024

 

 

 

33,381

 

Diluted

 

 

34,024

 

 

 

33,381

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

Net loss

 

$

(14,422

)

 

$

(8,693

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,735

)

 

 

(269

)

Total comprehensive loss

 

$

(16,157

)

 

$

(8,962

)

 

See accompanying notes to condensed consolidated financial statements.

4


CALAMP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

May 31,

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

$

(14,422

)

 

$

(8,693

)

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

 

 

 

 

 

 

 

Depreciation expense

 

4,910

 

 

 

3,845

 

Intangible asset amortization expense

 

1,892

 

 

 

3,040

 

Stock-based compensation expense

 

3,623

 

 

 

2,543

 

Amortization of discount and debt issuance costs

 

2,753

 

 

 

3,743

 

Impairment loss

 

4,289

 

 

 

 

Noncash operating lease cost

 

1,184

 

 

 

 

Revenue assigned to factors

 

(1,744

)

 

 

(1,109

)

Deferred tax assets, net

 

149

 

 

 

(2,158

)

Equity in net loss of affiliate and related impairment loss

 

 

 

 

530

 

Tax benefits on vested and exercised equity awards

 

 

 

 

56

 

Other

 

289

 

 

 

(69

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

4,961

 

 

 

9,858

 

Inventories

 

505

 

 

 

(4,059

)

Prepaid expenses and other assets

 

(424

)

 

 

1,415

 

Accounts payable

 

2,690

 

 

 

(12,252

)

Accrued liabilities

 

1,703

 

 

 

(2,664

)

Deferred revenue

 

(4,502

)

 

 

422

 

Operating lease liabilities

 

(1,915

)

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

5,941

 

 

 

(5,552

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from maturities of marketable securities

 

6,264

 

 

 

17,506

 

Purchases of marketable securities

 

(6,264

)

 

 

(9,835

)

Capital expenditures

 

(3,091

)

 

 

(4,954

)

Acquisitions, net of cash acquired

 

 

 

 

(63,010

)

Advances to affiliate

 

 

 

 

(530

)

NET CASH USED IN INVESTING ACTIVITIES

 

(3,091

)

 

 

(60,823

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from Paycheck Protection Program Loan

 

10,000

 

 

 

 

Repayment of Paycheck Protection Program Loan

 

(10,000

)

 

 

 

Proceeds from revolving credit facility

 

20,000

 

 

 

 

Repayment of 2020 Convertible Notes

 

(27,599

)

 

 

 

Payments of issuance cost of the revolving credit facility

 

(56

)

 

 

 

Taxes paid related to net share settlement of vested equity awards

 

(80

)

 

 

(219

)

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

 

23

 

 

 

97

 

NET CASH USED IN FINANCING ACTIVITIES

 

(7,712

)

 

 

(122

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

1,529

 

 

 

293

 

Net change in cash and cash equivalents

 

(3,333

)

 

 

(66,204

)

Cash and cash equivalents at beginning of period

 

107,404

 

 

 

256,500

 

Cash and cash equivalents at end of period

$

104,071

 

 

$

190,296

 

 

See accompanying notes to condensed consolidated financial statements.

5


CALAMP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

May 31,

 

 

2020

 

 

2019

 

Total stockholders' equity, beginning balances

$

137,919

 

 

$

205,653

 

 

 

 

 

 

 

 

 

Common stock and additional paid-in capital:

 

 

 

 

 

 

 

Beginning balances

 

220,825

 

 

 

208,541

 

Stock-based compensation expense

 

3,623

 

 

 

2,543

 

Shares issued on net share settlement of equity awards

 

(80

)

 

 

(219

)

Exercise of stock options and contributions to ESPP

 

23

 

 

 

97

 

Ending balances

 

224,391

 

 

 

210,962

 

 

 

 

 

 

 

 

 

Accumulated deficit:

 

 

 

 

 

 

 

Beginning balances

 

(81,531

)

 

 

(2,227

)

Cumulative effect of adoption of ASC 326

 

(134

)

 

 

 

Net loss

 

(14,422

)

 

 

(8,693

)

Ending balances

 

(96,087

)

 

 

(10,920

)

 

 

 

 

 

 

 

 

Accumulated other comprehensive income:

 

 

 

 

 

 

 

Beginning balances

 

(1,375

)

 

 

(661

)

Foreign currency translation adjustment

 

(1,735

)

 

 

(269

)

Ending balances

 

(3,110

)

 

 

(930

)

 

 

 

 

 

 

 

 

Total stockholders' equity, ending balances

$

125,194

 

 

$

199,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


CALAMP CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MAY 31, 2020 AND 2019

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 technology solutions pioneer leading transformation to a mobile connected economy. We help reinvent businesses and improve lives around the globe with technology solutions that streamline complex mobile 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 in the world from industrial machines, commercial and passenger vehicles, their drivers and contents. We are a global organization that is headquartered in Irvine, California.

Historically, we had two reportable segments, Software & Subscription Services and Telematics Systems. During the first quarter of fiscal 2021, our interim President and Chief Executive Officer, who is our new Chief Operating Decision Maker (“CODM”), realigned our operational structure into three reportable segments: Software & Subscriptions Services, Telematics Products and LoJack U.S. SVR Products. We have recast certain prior period amounts to conform to the way our CODM regularly reviews the segment performance. 

 

In March 2020, the World Health Organization declared the spread of COVID-19 as a pandemic. The full impact of the COVID-19 outbreak is inherently uncertain at the time of this report. The pandemic has resulted in travel restrictions, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. We cannot predict the extent to which the COVID-19 outbreak will negatively impact our business or operating results at this time.

 

We have considered all known and reasonably available information that existed as of May 31, 2020, in making accounting judgments, estimates and disclosures. We are monitoring the potential effects of the health care related and economic conditions of COVID-19 in assessing certain matters including (but not limited to) supply chain disruptions, decreases in customer demand for our products and services, potential longer-term effects on our customer and distribution channels particularly in the U.S. and relevant end markets as well as other developments. If the impact results in longer-term closures of businesses and economic recessionary conditions, we may recognize additional material asset impairments, charges for uncollectible accounts receivable in future periods and incur additional restructuring charges.

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 29, 2020 are condensed in 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 2020 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission on May 5, 2020.

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 May 31, 2020 and our results of operations for the three months ended May 31, 2020 and 2019. 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

We recognize revenue as follows:

 

Products. 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.

 

Accessories may also be sold to these customers. We recognize revenue for sales of accessories upon transfer of control to the customer based on stand-alone selling prices.

 

Software-as-a-Service (“SaaS”). We recognize our SaaS revenues and related cost of revenues in our Application subscriptions and other service revenues and cost of revenues on SaaS arrangements that combine various hardware devices over a stipulated service period.

 

7


Our integrated SaaS-based solutions for our fleet management, vehicle finance and certain other verticals provide 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 customized device, installation and application subscriptions. We have applied our judgment in determining that these integrated arrangements typically represent single performance obligations satisfied over time.

 

Accordingly, we defer the recognition of revenue for the customized devices that only function with our applications and are sold only on an integrated basis with our proprietary applicable subscriptions. Such customized devices and the application services are not sold separately. In such circumstances, the associated device related 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 revenue and deferred cost amounts are amortized to application subscriptions and other services revenue and cost of revenues, 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 to five years in the fleet management verticals. In certain fleet management contracts, we provide devices as part of the 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 under ASC 606 also includes prepayments from our customers for various subscription services but does not include future subscription fees associated with customers’ unexercised contract renewal rights.

 

In certain customer arrangements, we sell or lease vehicle location devices together with related monitoring services as part of the contractual arrangement. The devices leased to our customers are capitalized as property and equipment and being depreciated over the life of the devices. From time to time we sell devices and monitoring services separately to customers and sell similar devices on a stand-alone basis to licensees. Accordingly, we recognize revenues for the sales of the devices upon transfer of control to the customer and recognize revenue for the related monitoring services over the service period. The allocation of the transaction price is based on relative estimated stand-alone selling prices for the devices and the monitoring services.

 

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 are recognized as the related services are performed. For certain professional service contracts, we recognize revenue over time based on the proportion of total costs incurred to-date over the estimated cost of the contract, which is an input method.

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 to 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 fiscal quarter ended May 31, 2020, we recognized $13.5 million in revenue from the deferred revenue balance of $62.2 million as of February 29, 2020. Certain incremental costs of obtaining a contract with a customer consist of sales commissions, which are recognized on a straight-line basis over the life of the corresponding contracts. Prepaid commissions totaled $4.0 million as of May 31, 2020, of which $1.9 million was classified as non-current.

 

We disaggregate revenue from contracts with customers into reportable segments, geography, type of goods and services and timing of revenue recognition. See Note 16 for our revenue by segment and geography. The disaggregation of revenue by type of goods and services and by timing of revenue recognition, which reflect the immaterial corrections as discussed below, was as follows (in thousands):

 

 

Three Months Ended

 

 

May 31,

 

 

2020

 

 

2019

 

Revenue by type of goods and services:

 

 

 

 

 

 

 

Telematics devices and accessories

$

53,106

 

 

$

65,763

 

Rental income and other services

 

2,437

 

 

 

4,430

 

Recurring application subscriptions

 

24,672

 

 

 

18,877

 

Total

$

80,215

 

 

$

89,070

 

8


 

 

 

Three Months Ended

 

 

May 31,

 

 

2020

 

 

2019

 

Revenue by timing of revenue recognition:

 

 

 

 

 

 

 

Revenue recognized at a point in time

$

55,227

 

 

$

69,284

 

Revenue recognized over time

 

24,988

 

 

 

19,786

 

Total

$

80,215

 

 

$

89,070

 

 

Product revenues presented in the table above include devices sold in customer arrangements that include both the device and monitoring services. Recurring application subscriptions revenues include the amortization for customized devices functional only with application subscriptions.

 

Remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue on our condensed consolidated balance sheets and unbilled amounts that will be recognized as revenue in future periods. As of May 31, 2020 and February 29, 2020, we have estimated remaining performance obligations for contractually committed revenues of $135.7 million and $134.5 million, respectively. As of May 31, 2020, we expect to recognize approximately 40% in fiscal 2021 and 28% in fiscal 2022. As of February 29, 2020, we expected to recognize approximately 44% in fiscal 2021 and 26% in fiscal 2022. We have utilized the practical expedient exception within ASC 606 and exclude contracts that have original durations of less than one year from the aforementioned remaining performance obligation disclosure.

 

Revision of Previously Issued Condensed Consolidated Financial Statements. Subsequent to the issuance of the consolidated financial statements for the year ended February 29, 2020, we concluded that the presentation of revenues and cost of revenues should be adjusted to present product and service revenues and the related cost of revenues for each separately in accordance with SEC Regulation S-X, Rule 5-03(b). Additionally, certain historical information in the notes to the condensed consolidated financial statements have been revised to reflect the impact of these corrections. We have determined that the correction of these classification errors is not material to the previously issued consolidated financial statements. The following table summarizes the impact of the immaterial adjustments.

 

 

Three Months Ended May 31, 2019

 

 

As Reported

 

 

Adjustment

 

 

As Corrected

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Products

$

63,559

 

 

$

2,204

 

 

$

65,763

 

Application subscriptions and other services

 

25,511

 

 

 

(2,204

)

 

 

23,307

 

Total revenues

$

89,070

 

 

$

-

 

 

$

89,070

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

Products

$

38,548

 

 

$

1,258

 

 

$

39,806

 

Application subscriptions and other services

 

15,111

 

 

 

(1,258

)

 

 

13,853

 

Total cost of revenues

$

53,659

 

 

$

-

 

 

$

53,659

 

 

 

Three Months Ended May 31, 2019

 

 

As Reported

 

 

Adjustment

 

 

As Corrected

 

Revenue by type of goods and services:

 

 

 

 

 

 

 

 

 

 

 

Telematics devices and accessories

$

68,168

 

 

$

(2,405

)

 

$

65,763

 

Rental income and other services

 

1,947

 

 

 

2,483

 

 

 

4,430

 

Recurring application subscriptions

 

18,955

 

 

 

(78

)

 

 

18,877

 

Total

$

89,070

 

 

$

-

 

 

$

89,070

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue by timing of revenue recognition:

 

 

 

 

 

 

 

 

 

 

 

Revenue recognized at a point in time

$

68,168

 

 

$

1,116

 

 

$

69,284

 

Revenue recognized over time

 

20,902

 

 

 

(1,116

)

 

 

19,786

 

Total

$

89,070

 

 

$

-

 

 

$

89,070

 

 

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.

9


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.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. Except for the increase in expected credit losses, we are not aware of any specific event or circumstances that would require an update to our estimates or assumptions or a revision of the carrying value of our assets or liabilities as of the date of this Quarterly Report on Form 10-Q. These estimates and assumptions may change as new events occur and additional information is obtained. As a result, actual results could differ materially from these estimates and assumptions.

During the quarter ended May 31, 2020, we analyzed the credit risk associated with our accounts receivables and lease receivables. Our historical loss rates have not shown any significant differences between customer industries or geographies, and, upon adoption of ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”), we grouped all accounts receivables and lease receivables into a single portfolio. As disclosed in Note 16, Segment Information and Geographic Data, we do not have significant international geographic concentrations of revenue, and, as a result, we do not have significant concentrations of accounts receivables or lease receivables in any single geography outside of the United States. As a result of our adoption of ASU 2016-13, we recognized the cumulative effect of initially applying the guidance as a $0.1 million addition to our allowance for doubtful accounts with an offsetting adjustment to accumulated deficit.

The allowance for doubtful accounts totaled $3.6 million and $3.1 million as of May 31, 2020 and February 29, 2020, respectively.

Goodwill and Other Long-Lived Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. We test goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test.

 

In accordance with Accounting Standards Update 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which we adopted in the fourth quarter of fiscal 2020, the impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

 

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. 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. In the fourth quarter of fiscal 2020, we determined that the prolonged secular decline in revenues from our legacy LoJack U.S. SVR products coupled with the slower than anticipated market penetration of our telematics solutions in the U.S. automotive dealership channel represented determinate indications of impairment. These factors were further exacerbated by the immediate unfavorable impact that the COVID-19 pandemic has had on the automotive end markets over the past four months. We recorded an impairment loss of $19.1 million during the fourth quarter of fiscal 2020 related to certain intangible assets and other long-lived assets. As the COVID-19 pandemic continues to impact the market and our business operations, we reevaluated the carrying amount of goodwill as well as intangible and long-lived assets supporting these products during the first quarter of fiscal 2021. Based upon our assessment of economic conditions, our expectations of future business conditions and trends, our projected revenues, earnings, and cash flows, we determined that goodwill and dealer relationships utilized in our LoJack U.S. SVR reporting unit were impaired as of May 31, 2020. As a result, we recorded an impairment loss of $3.9 million for goodwill and $0.4 million for dealer relationships during the first quarter of fiscal 2021. Any deterioration in future operating cash flows of this reporting unit may result in further impairment of goodwill and other long-lived assets, including intangible assets.

 

10


We estimate the fair value of goodwill and other long-lived assets including dealership relationships based on discounted cash flow techniques (Level 3 determination of fair value). Significant inputs to the valuation model include:

 

 

estimated future cash flows;

 

growth assumptions for future revenues as well as future gross margin rates, expense rates, capital expenditures and other estimates; and

 

rate used to discount our estimated future cash flow projections to their present value (or estimated fair value) based on our estimated weighted average cost of capital.

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.

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 condensed 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 was $0.2 million and $0.4 million for the three months ended May 31, 2020 and 2019, respectively.

 

Other Comprehensive Income (Loss)

Other 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 U.S. GAAP are recorded as an element of stockholders’ equity and excluded from net income (loss). Our OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.

11


Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13, Financial Instruments - Credit Losses, or ASC 326. The new standard amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology. We adopted the new allowance for credit losses accounting standard on March 1, 2020 by means of recognizing the cumulative effect of initially applying the guidance as a $0.1 million addition to our allowance for doubtful accounts with an offsetting adjustment to accumulated deficit. See Accounts Receivable and Allowance for Doubtful Accounts above.

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs incurred to develop or obtain internal-use software. We adopted this standard prospectively effective March 1, 2020. As a result of the adoption, we recorded certain costs, particularly those incurred during the application development phase, related to the implementation of cloud computing arrangements in prepaid expenses which historically had been recorded in property and equipment. Capitalized costs related to cloud computing arrangements for the three months ended May 31, 2020, which are included in prepaid expenses and other current assets on our condensed consolidated balance sheets, were not material.

NOTE 2 – ACQUISITIONS

We acquired LoJack Mexico and Synovia in March 2019 and April 2019, respectively. The following are the final purchase price allocations for the two acquisitions (in thousands):

 

 

 

LoJack Mexico

 

 

Synovia

 

Purchase price

 

 

 

 

 

$

14,306

 

 

 

 

 

 

$

29,500

 

Add debt paid at closing

 

 

 

 

 

 

-

 

 

 

 

 

 

 

20,296

 

Less cash acquired, net of debt assumed

 

 

 

 

 

 

(1,586

)

 

 

 

 

 

 

(889

)

Net cash paid

 

 

 

 

 

 

12,720

 

 

 

 

 

 

 

48,907

 

Add previously held interest

 

 

 

 

 

 

2,021

 

 

 

 

 

 

 

-

 

Fair value of net assets and liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets other than cash

 

$

4,537

 

 

 

 

 

 

$

9,637

 

 

 

 

 

Property and equipment

 

 

3,652

 

 

 

 

 

 

 

24,840

 

 

 

 

 

Customer relationships

 

 

7,000

 

 

 

 

 

 

 

16,700

 

 

 

 

 

Trade name

 

 

-

 

 

 

 

 

 

 

1,600

 

 

 

 

 

Developed technology

 

 

-

 

 

 

 

 

 

 

3,800

 

 

 

 

 

Deferred tax assets

 

 

-

 

 

 

 

 

 

 

2,061

 

 

 

 

 

Other non-current assets

 

 

1,301

 

 

 

 

 

 

 

177

 

 

 

 

 

Current liabilities

 

 

(2,586

)

 

 

 

 

 

 

(4,645

)

 

 

 

 

Due to factors

 

 

-

 

 

 

 

 

 

 

(19,692

)

 

 

 

 

Deferred revenue

 

 

(4,507

)

 

 

 

 

 

 

(4,319

)

 

 

 

 

Deferred tax liability

 

 

(943

)

 

 

 

 

 

 

-

 

 

 

 

 

Total fair value of net assets acquired

 

 

 

 

 

 

8,454

 

 

 

 

 

 

 

30,159

 

Goodwill

 

 

 

 

 

$

6,287

 

 

 

 

 

 

$

18,748

 

 

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

 

We incurred approximately $1.2 million for the acquisition of these entities in fiscal 2020. 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 months ended May 31, 2019 for the acquired companies is not disclosed as the results are not material to our condensed consolidated financial statements.

 

12


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 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 for the three months ended May 31, 2019. LoJack Mexico is consolidated with our financial statements effective March 19, 2019 as a component of our Software & Subscription Services reportable segment.

 

The goodwill arising from the acquisition of LoJack Mexico is not deductible for income tax purposes.

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. The Synovia acquisition expands our fleet management and vehicle safety services portfolio as well as 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.

 

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

NOTE 3 – CASH, CASH EQUIVALENTS AND INVESTMENTS

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

 

 

As of May 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Classification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of Fair Value

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Cash and

 

 

 

 

 

 

Adjusted

 

 

Gains

 

 

Fair

 

 

Cash

 

 

Other

 

 

Cost

 

 

(Losses)

 

 

Value

 

 

Equivalents

 

 

Assets

 

Cash

$

28,293

 

 

$

 

 

$

28,293

 

 

$

28,293

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

75,778

 

 

 

 

 

 

75,778

 

 

 

75,778

 

 

 

 

Mutual funds (1)

 

3,926

 

 

 

6

 

 

 

3,932

 

 

 

 

 

 

3,932

 

Total

$

107,997

 

 

$

6

 

 

$

108,003

 

 

$

104,071

 

 

$

3,932

 

 

 

As of February 29, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Classification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of Fair Value

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Cash and

 

 

 

 

 

 

Adjusted

 

 

Gains

 

 

Fair

 

 

Cash

 

 

Other

 

 

Cost

 

 

(Losses)

 

 

Value

 

 

Equivalents

 

 

Assets

 

Cash

$

31,895

 

 

$

 

 

$

31,895

 

 

$

31,895

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

5,508

 

 

 

 

 

 

5,508

 

 

 

5,508

 

 

 

 

Mutual funds (1)

 

3,926

 

 

 

26

 

 

 

3,952

 

 

 

 

 

 

3,952

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

60,000

 

 

 

 

 

 

60,000

 

 

 

60,000

 

 

 

 

Corporate bonds

 

10,001

 

 

 

 

 

 

10,001

 

 

 

10,001

 

 

 

 

Total

$

111,330

 

 

$

26

 

 

$

111,356

 

 

$

107,404

 

 

$

3,952

 

 

(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 May 31, 2020, the cash surrender value of COLI was $1.7 million. 

13


NOTE 4 - INVENTORIES

Inventories consist of the following (in thousands):

 

 

May 31,

 

 

February 29,

 

 

2020

 

 

2020

 

Raw materials

$

17,453

 

 

$

18,118

 

Finished goods

 

18,626

 

 

 

18,660

 

 

$

36,079

 

 

$

36,778

 

 

NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS

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

 

 

 

 

 

Gross

 

 

Accumulated Amortization

 

 

Net

 

 

 

Useful Life

 

Feb. 29,

2020

 

 

Additions & Adjustments, net (1)

 

 

Impair-

ment

 

 

May 31,

2020

 

 

Feb. 29,

2020

 

 

Expense

 

 

May 31,

2020

 

 

Feb. 29,

2020

 

 

May 31,

2020

 

Developed technology

 

2-7 years

 

$

27,363

 

 

 

(52

)

 

 

 

 

$

27,311

 

 

$

21,437

 

 

$

754

 

 

$

22,191

 

 

$

5,926

 

 

$

5,121

 

Tradenames

 

10 years

 

 

30,093

 

 

 

(74

)

 

 

 

 

 

30,019

 

 

 

16,303

 

 

 

529

 

 

 

16,832

 

 

 

13,790

 

 

 

13,187

 

Customer lists

 

4-7 years

 

 

25,304

 

 

 

 

 

 

 

 

 

25,304

 

 

 

22,903

 

 

 

48

 

 

 

22,951

 

 

 

2,401

 

 

 

2,353

 

Dealer and customer relationships

 

7-12 years

 

 

34,139

 

 

 

(787

)

 

 

(365

)

 

 

32,987

 

 

 

10,753

 

 

 

552

 

 

 

11,305

 

 

 

23,386

 

 

 

21,682

 

Patents

 

5 years

 

 

589

 

 

 

 

 

 

 

 

 

589

 

 

 

197

 

 

 

9

 

 

 

206

 

 

 

392

 

 

 

383

 

 

 

 

 

$

117,488

 

 

$

(913

)

 

$

(365

)

 

$

116,210

 

 

$

71,593

 

 

$

1,892

 

 

$

73,485

 

 

$

45,895

 

 

$

42,725

 

 

(1)

Amounts also include any net changes in intangible asset balances for the periods presented that resulted from foreign currency translations.

 

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. In the first quarter of fiscal 2021, we determined that the prolonged secular decline in legacy LoJack U.S. SVR products revenue coupled with the slower than anticipated market penetration of our telematics solutions in the U.S. automotive dealership channel represented determinate indications of impairment. As a result, we performed an assessment of the carrying amount of the related intangible assets supporting these products. Our assessment of the future cash flows generates by these assets concluded that an impairment loss was present. We recorded an impairment loss of $0.4 million for U.S. dealer relationships during the quarter ended May 31, 2020.

 

Estimated future amortization expense as of May 31, 2020 is as follows (in thousands):

 

2021 (remainder)

 

$

5,522

 

2022

 

 

5,778

 

2023

 

 

5,558

 

2024

 

 

4,445

 

2025

 

 

4,322

 

Thereafter

 

 

17,101

 

 

 

$

42,725

 

 

Changes in goodwill are as follows (in thousands):

 

 

Software & Subscription Services

 

 

Telematics Products

 

 

LoJack U.S. SVR Products

 

 

Total

 

Balance as of February 29, 2020

$

55,132

 

 

$

39,180

 

 

$

12,023

 

 

$

106,335

 

Impairment loss

 

 

 

 

 

 

 

(3,924

)

 

 

(3,924

)

Effect of exchange rate change on goodwill

 

(992

)

 

 

 

 

 

 

 

 

(992

)

Balance as of May 31, 2020

$

54,140

 

 

$

39,180

 

 

$

8,099

 

 

$

101,419

 

 

14


There was no impairment of goodwill for fiscal 2020. The fair value of the LoJack US SVR reporting unit exceeds its carrying amount of $12 million by approximately 8% as of February 29, 2020. As the COVID-19 pandemic continues to impact the market and our business operations, we reevaluated the carrying amount of goodwill during the first quarter of fiscal 2021. Based upon our assessment of economic conditions, our expectations of future business conditions and trends, our projected revenues, earnings, and cash flows, we determined that goodwill utilized in our LoJack U.S. SVR reporting unit was impaired as of May 31, 2020. As a result, we recorded an impairment loss of $3.9 million for goodwill during the first quarter of fiscal 2021. Any deterioration in future operating cash flows of this reporting unit may result in further impairment of goodwill and other long-lived assets, including intangible assets

 

NOTE 6 – OTHER ASSETS

Other assets consist of the following (in thousands):

 

 

May 31,

 

 

February 29,

 

 

2020

 

 

2020

 

Deferred cost

$

6,905

 

 

$

7,818

 

Deferred compensation plan assets

 

5,895

 

 

 

6,041

 

Lease receivables, non-current

 

5,495

 

 

 

5,992

 

Prepaid commissions

 

1,942

 

 

 

2,318

 

Other

 

2,657

 

 

 

2,599

 

 

$

22,894

 

 

$

24,768

 

 

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 May 31, 2020 and February 29, 2020 (in thousands):

 

 

 

Maturity

 

Effective

 

 

May 31,

 

 

February 29,

 

 

Date

 

Interest Rate

 

 

2020

 

 

2020

 

2020 Convertible Notes, 1.625% fixed rate

May 15, 2020

 

 

6.20

%

 

$

-

 

 

$

27,599

 

2025 Convertible Notes, 2.00% fixed rate

August 1, 2025

 

 

7.56

%

 

 

230,000

 

 

 

230,000

 

Revolving Credit Facility

March 30, 2022

 

 

3.50

%

 

 

20,000

 

 

 

-

 

Due to factors

2020 - 2024

 

 

4.70

%

 

 

12,627

 

 

 

14,371

 

Total term debt

 

 

 

 

 

 

 

262,627

 

 

 

271,970

 

Unamortized discount and issuance costs

 

 

 

 

 

 

 

(59,017

)

 

 

(61,763

)

Less: Current portion of long-term term debt

 

 

 

 

 

 

 

(5,490

)

 

 

(33,119

)

Long-term debt, net of current portion

 

 

 

 

 

 

$

198,120

 

 

$

177,088

 

 

The effective interest rates for the convertible notes include the interest on the notes and amortization of the discount. As of May 31, 2020 and February 29, 2020, the fair value of the 2025 Convertible Notes was $164 million and $197 million, respectively, based on Level 2 inputs.

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.

 

      

15


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.

2020 Convertible Notes

 

On May 15, 2020, we repaid the remaining principal balance of $27.6 million of the 1.625% convertible senior unsecured notes issued in May 2015.

Revolving Credit Facility

On March 30, 2018, we entered into a revolving credit facility with J.P. Morgan Chase Bank that provides for borrowings up to $50.0 million. This revolving credit facility was extended on March 27, 2020 with a new maturity date of March 30, 2022. At our election, the borrowings under this revolving credit facility bear interest at (a) for base rate loans, a base rate based on the highest of (i) 0%, (ii) the rate of interest publicly announced by JP Morgan Chase Bank, N.A. (the “Agent”) as its prime rate in effect at its principal office in New York City, (iii) the overnight bank funding rate as determined by the Federal Reserve Bank of New York plus 0.50% and (iv) the LIBOR-based rate for a one-month interest period on such day plus 1%; or (b) for Eurodollar loans, the higher of (x) 1.00% and (y) the LIBOR-based rate for one, three or six months (as selected by the Company) for Eurodollar deposits. An applicable margin is added based on the Company’s senior leverage ratio, ranging from 1.50% to 2.00% for base rate loans, and from 2.50% to 3.00% for Eurodollar loans. We will also pay a commitment fee based on our senior leverage ratio ranging from 0.40% to 0.50%, payable quarterly in arrears, on the average daily unused amount of the Credit Facility. Amounts owing under the credit agreement and related credit documents are guaranteed by the Company and certain of its subsidiaries. We have also granted security interests in substantially all of our respective assets to secure these obligations. The net proceeds available under the revolving credit facility can be used for repayment of existing debt, working capital and general corporate purposes. There were $20.0 million in borrowings outstanding under this revolving credit facility at May 31, 2020.

 

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 May 31, 2020, we were in compliance with our covenants under the revolving credit facility.

 

Synovia Revenue Assignments

 

In conjunction with the acquisition of Synovia on April 12, 2019, 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.

 

These arrangements with the Factors met the criteria in ASC 470-10-25, Sales of Future Revenues or Various Other Measures of Income, 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. 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 is being amortized under the interest method. During both the three months ended May 31, 2020 and 2019, we recognized $0.1 million of interest expense related to this debt. The revenues recognized from this arrangement of $1.7 million and $1.1 million were considered a non-cash activity in our condensed consolidated statements of cash flows for the three months ended May 31, 2020 and 2019, respectively.

 

 

 

NOTE 8 – RESTRUCTURING CHARGES

Beginning in 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 $14.3 million, comprised of $8.6 million in severance and employee related costs, and $5.7 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 $3.3 million, which was sub-leased starting in May 2020. The anticipated rent payments for the ceased-use leased facilities will be made through December 2025. Substantially all charges related to severance and employee costs were under the Telematics Products and LoJack U.S. SVR Products reportable segments. 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.

16


For the three months ended May 31, 2020, total restructuring charges were $1.9 million, comprised of $1.8 million in severance and employee related costs, which included $0.9 million stock-based compensation, and $0.1 million for vacant facilities. The restructuring liabilities related to personnel were included in Accrued payroll and employee benefits in our condensed consolidated balance sheets as of May 31, 2020 and February 29, 2020.

 

The following table summarizes the charges resulting from the implementation of the restructuring plan for the three months ended May 31, 2020 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended May 31, 2020

 

 

 

Personnel

 

 

Facilities

 

 

Total

 

 

Cost of revenues

$

(124

)

 

$

103

 

 

$

(21

)

 

Research and development

 

(6

)

 

 

-

 

 

 

(6

)

 

Selling and marketing

 

30

 

 

 

-

 

 

 

30

 

 

General and administrative

 

1,905

 

 

 

-

 

 

 

1,905

 

 

Total

$

1,805

 

 

$

103

 

 

$

1,908

 

 

 

There were no restructuring charges for the three months ended May 31, 2019.

 

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 29, 2020

$

2,383

 

 

$

359

 

 

$

2,742

 

Charges

 

930

 

 

 

103

 

 

 

1,033

 

Payments

 

(1,230

)

 

 

(225

)

 

 

(1,455

)

Restructuring liabilities as of May 31, 2020

$

2,083

 

 

$

237

 

 

$

2,320

 

 

 

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

 

May 31, 2020

 

Assets

 

 

 

 

 

 

Operating lease right-of-use assets

 

Operating lease right-of-use assets

 

$

24,220

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Operating lease liabilities (current)

 

Other current liabilities

 

$

5,987

 

Operating lease liabilities (noncurrent)

 

Operating lease liabilities

 

 

25,692

 

Total lease liabilities

 

 

 

$

31,679

 

 

 

 

 

 

 

 

 

Lease Costs

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

 

 

 

Three Months Ended

May 31, 2020

 

 

 

 

Three Months Ended

May 31, 2019

 

Operating lease cost

 

$

1,932

 

 

 

 

$

2,001

 

Short-term lease cost

 

 

871

 

 

 

 

 

312

 

Variable lease cost

 

 

304

 

 

 

 

 

30

 

Total lease cost

 

$

3,107

 

 

 

 

$

2,343

 

 

 

 

 

 

 

 

 

 

 

 

 

17


Supplemental Information

The table below presents supplemental information related to operating leases during the three months ended May 31, 2020 (in thousands, except weighted-average information):

 

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

 

$

2,100

 

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

 

$

4,683

 

Weighted average remaining lease term

 

6.5 years

 

Weighted average discount rate

 

 

5.24

%

 

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 May 31, 2020 (in thousands):

 

Remainder of 2021

 

$

5,525

 

2022

 

 

6,781

 

2023

 

 

6,308

 

2024

 

 

4,761

 

2025

 

 

3,019

 

Thereafter

 

 

9,613

 

Total minimum lease payments

 

 

36,007

 

Less imputed interest

 

 

(4,328

)

Present value of future minimum lease payments

 

 

31,679

 

Less current obligations under leases

 

 

(5,987

)

Long-term lease obligations

 

$

25,692

 

 

 

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.

 

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. The income tax expense of $0.2 million for the three months ended May 31, 2020 was primarily attributable to one of our foreign subsidiaries. The income tax benefit associated with the pre-tax loss for the quarter ended May 31, 2020 ,which was primarily from the U.S. jurisdiction, was offset by a full valuation allowance.

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.

18


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

 

 

May 31,

 

 

2020

 

 

2019

 

Net loss

$

(14,422

)

 

$

(8,693

)

Basic weighted average number of common shares outstanding

 

34,024

 

 

 

33,381

 

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

 

 

 

 

 

Diluted weighted average number of common shares outstanding

 

34,024

 

 

 

33,381

 

Loss per share:

 

 

 

 

 

 

 

Basic

$

(0.42

)

 

$

(0.26

)

Diluted

$

(0.42

)

 

$

(0.26

)

 

All outstanding options and restricted stock units for the three months ended May 31, 2020 and 2019 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 2025 Convertible 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

 

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

 

 

Three Months Ended

 

 

May 31,

 

 

2020

 

 

2019

 

Cost of revenues

$

175

 

 

$

175

 

Research and development

 

646

 

 

 

413

 

Selling and marketing

 

505

 

 

 

669

 

General and administrative

 

1,422

 

 

 

1,286

 

Restructuring

 

875

 

 

 

-

 

 

$

3,623

 

 

$

2,543

 

 

Changes in our outstanding stock options during the three months ended May 31, 2020 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 29, 2020

 

1,071

 

 

$

14.65

 

 

 

6.2

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

(10

)

 

 

2.34

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

(49

)

 

 

21.57

 

 

 

 

 

 

 

 

 

Outstanding at May 31, 2020

 

1,012

 

 

$

14.44

 

 

 

5.9

 

 

$

463

 

Exercisable at May 31, 2020

 

623

 

 

$

13.38

 

 

 

4.5

 

 

$

463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19


Changes in our outstanding restricted stock shares, performance stock units (“PSUs”) and restricted stock units (“RSUs”) during the three months ended May 31, 2020 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 29, 2020

 

2,215

 

 

$

14.47

 

 

 

 

 

Granted

 

89

 

 

 

7.61

 

 

 

 

 

Vested

 

(34

)

 

 

15.93

 

 

 

13

 

Forfeited

 

(135

)

 

 

13.90

 

 

 

 

 

Outstanding at May 31, 2020

 

2,135

 

 

$

14.19

 

 

 

 

 

 

As of May 31, 2020, there was $19.1 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 3.6 years.

NOTE 13 - 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

May 31,

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

Customer A

 

14

%

 

 

14

%

 

 

May 31,

 

 

February 29,

 

 

2020

 

 

2020

 

Accounts receivable:

 

 

 

 

 

 

 

Customer A

 

15

%

 

 

19

%

 

 

 

 

 

 

 

 

 

Significant Suppliers

We purchase a significant amount of our inventory from certain manufacturers or suppliers including components, assemblies and electronic manufacturing parts. These suppliers are located in Asia, including China. 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 generally pass to us upon shipment from the manufacturers’ plant or warehouse. For the three months ended May 31, 2020, four of our suppliers accounted for approximately 61% of our total inventory purchases and for the three months ended May 31, 2019, two of our suppliers accounted for approximately 47% of total inventory purchases. As identified below, some of these manufacturers accounted for more than 10% of our accounts payable as follows (rounded):

 

 

 

May 31,

 

 

February 29,

 

 

2020

 

 

2020

 

Accounts payable:

 

 

 

 

 

 

 

Supplier A

 

17

%

 

 

11

%

Supplier B

 

13

%

 

 

11

%

 

 

 

 

 

 

 

 

 

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.

20


NOTE 14 - 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):

 

 

Three Months Ended

 

 

May 31,

 

 

2020

 

 

2019

 

Balance at beginning of period

$

987

 

 

$

1,398

 

Charged to costs and expenses

 

200

 

 

 

112

 

Deductions

 

(145

)

 

 

(273

)

Balance at end of period

$

1,042

 

 

$

1,237

 

 

NOTE 15 – OTHER FINANCIAL INFORMATION

Supplemental Balance Sheet Information

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

 

 

May 31,

 

 

February 29,

 

 

2020

 

 

2020

 

Operating lease liabilities

$

5,987

 

 

$

4,662

 

Litigation reserve

 

2,200

 

 

 

1,500

 

Customer deposit

 

1,835

 

 

 

1,377

 

Interest payable

 

1,531

 

 

 

481

 

Taxes payable

 

1,496

 

 

 

2,266

 

Warranty reserves

 

1,043

 

 

 

915

 

Other (1)

 

4,958

 

 

 

4,952

 

 

$

19,050

 

 

$

16,153

 

 

 

(1)

Amount represents accruals for various operating expense such as professional fees, vendor incentives and other estimates that are expected to be paid within the next 12 months

 

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

 

 

May 31,

 

 

February 29,

 

 

2020

 

 

2020

 

Deferred revenue

$

24,082

 

 

$

27,452

 

Deferred compensation plan liability

 

5,802

 

 

 

5,919

 

Other

 

2,378

 

 

 

1,673

 

 

$

32,262

 

 

$

35,044

 

 

Supplemental Statement of Comprehensive Income (Loss) Information

Interest expense consists of the following (in thousands):

 

 

Three Months Ended

 

 

May 31,

 

 

2020

 

 

2019

 

Interest expense on 2020 Convertible Notes:

 

 

 

 

 

 

 

Stated interest at 1.625% per annum

$

93

 

 

$

498

 

Amortization of discount and issue costs

 

289

 

 

 

1,456

 

 

 

382

 

 

 

1,954

 

Interest expense on 2025 Convertible Notes:

 

 

 

 

 

 

 

Stated interest at 2.00% per annum

 

1,163

 

 

 

1,176

 

Amortization of discount and issue costs

 

2,311

 

 

 

2,168

 

 

 

3,474

 

 

 

3,344

 

Other interest expense

 

221

 

 

 

158

 

Total interest expense

$

4,077

 

 

$

5,456

 

21


 

Supplemental Cash Flow Information

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

 

 

Three Months Ended

 

 

May 31,

 

 

2020

 

 

2019

 

Interest expense paid

$

257

 

 

$

1,027

 

Income tax paid, net of refunds

$

274

 

 

$

-

 

 

NOTE 16 - SEGMENT INFORMATION AND GEOGRAPHIC DATA

Prior to the fourth quarter of fiscal 2020, our two reportable segments, Software & Subscription Services and Telematics Systems, also represented our two reporting units for goodwill impairment testing. During the fourth quarter of fiscal 2020, our former Chief Operating Decision Maker (“CODM”) changed our reporting structure, resulting in four reporting units with two reporting units under each of our reportable segments. During the first quarter of fiscal 2021, our interim President and Chief Executive Officer, who is our new CODM, realigned our operational structure into three reportable segments: Software & Subscriptions Services, Telematics Products and LoJack U.S. SVR Products. We have recast certain prior period amounts to conform to the way our CODM regularly reviews the segment performance .

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.

Our Telematics Products 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 Product segment revenues consist primarily of stand-alone product sales.

Our LoJack U.S. SVR Product segment represents the portfolio of security and protection products and services for tracking and recovering cars, trucks and other valuable mobile assets. LoJack U.S. SVR Product segment revenues consist primarily of stand-alone product sales.

Segment information is as follows (in thousands):

 

 

Three Months Ended May 31, 2020

 

 

Three Months Ended May 31, 2019

 

 

Reportable Segments

 

 

 

 

 

 

 

 

 

 

Reportable Segments

 

 

 

 

 

 

 

 

 

 

Software & Subscription Services

 

 

Telematics Products

 

 

LoJack U.S. SVR Products

 

 

Corporate Expenses

 

 

Total

 

 

Software & Subscription Services

 

 

Telematics Products

 

 

LoJack U.S. SVR Products

 

 

Corporate Expenses

 

 

Total

 

Revenues

$

28,029

 

 

$

45,539

 

 

$

6,647

 

 

 

 

 

 

$

80,215

 

 

$

25,511

 

 

$

51,198

 

 

$

12,361

 

 

 

 

 

 

$

89,070

 

Gross profit

$

13,815

 

 

$

15,120

 

 

$

2,118

 

 

 

 

 

 

$

31,053

 

 

$

10,400

 

 

$

20,044

 

 

$

4,967

 

 

 

 

 

 

$

35,411

 

Gross margin

 

49

%

 

 

33

%

 

 

32

%

 

 

 

 

 

 

39

%

 

 

41

%

 

 

39

%

 

 

40

%

 

 

 

 

 

 

40

%

Adjusted EBITDA

$

6,354

 

 

$

3,123

 

 

$

(1,573

)

 

$

(1,397

)

 

$

6,507

 

 

$

2,374

 

 

$

7,863

 

 

$

(870

)

 

$

(1,798

)

 

$

7,569

 

 

 

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.

22


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 reportable 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

May 31,

 

 

2020

 

 

2019

 

Net loss

$

(14,422

)

 

$

(8,693

)

Investment income

 

(18

)

 

 

(2,081

)

Interest expense

 

4,077

 

 

 

5,456

 

Income tax provision (benefit)

 

240

 

 

 

(2,257

)

Depreciation

 

4,910

 

 

 

3,845

 

Amortization of intangible assets

 

1,892

 

 

 

3,040

 

Stock-based compensation

 

2,748

 

 

 

2,543

 

Impairment loss

 

4,289

 

 

 

 

Impairment loss and equity in net loss of affiliate

 

 

 

 

530

 

Restructuring charges

 

1,908

 

 

 

 

Non-recurring legal expenses

 

793

 

 

 

3,807

 

Acquisition and integration related expenses

 

 

 

 

1,144

 

Other

 

90

 

 

 

235

 

Adjusted EBITDA

$

6,507

 

 

$

7,569

 

 

Our CODM does not obtain identifiable assets by segment because our businesses share resources, functions and facilities. We do not have significant long-lived assets outside the United States.

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

 

 

Three Months Ended

 

 

May 31,

 

 

2020

 

 

2019

 

United States

$

51,550

 

 

$

63,122

 

Europe, Middle East and Africa

 

15,906

 

 

 

13,426

 

South America

 

6,042

 

 

 

5,528

 

Asia and Pacific Rim

 

2,339

 

 

 

2,409

 

All other

 

4,378

 

 

 

4,585

 

 

$

80,215

 

 

$

89,070

 

 

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 months ended May 31, 2020 and 2019.

 

NOTE 17 – LEGAL PROCEEDINGS

 

Omega patent infringement claim

 

 On May 5, 2020, we filed our Form 10-K for the fiscal year ended February 29, 2020 which disclosed the current status of the Omega patent infringement claim.

 

In summary, on March 20, 2020, the U.S. District Court for the Middle District of Florida (the “Trial Court”) denied our motion for judgement as a matter of law (“JMOL”), a new trial, and remittitur of damages. Also, on March 20, 2020, the Trial Court denied Omega’s motion for a new trial on willfulness. On April 1, 2020, the Trial Court denied Omega’s motion to enhance the royalty rate beyond the jury’s award of $5 per unit and motion to conduct post-trial discovery on CalAmp’s other OBD-II compliant LMUs. On April 3, 2020, the Trial Court denied Omega’s final motion regarding infringement of the VPODs. On April 30, 2020, we filed a notice of appeal at the Federal Circuit. Also on April 30, 2020, Omega filed notices of cross-appeal at the Federal Circuit.

 

23


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 condensed consolidated results of operations, financial condition and cash flows.

 

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 judgment and amounts described above could be upheld, which would exceed the amounts we have accrued by a material amount.

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, we may receive claims concerning contract performance or claims that our products or services infringe the intellectual property of third parties which are in the ordinary course of business. While the outcome of any such claims or litigation cannot be predicted with certainty, management does not believe that the outcome of such matters existing at the present time would have a material adverse effect on our condensed consolidated results of operations, financial condition or cash flows.

24


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 condensed 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 29, 2020, as filed with the U.S. Securities and Exchange Commission on May 5, 2020, and include the following areas:

 

Revenue recognition;

 

Allowance for doubtful accounts;

 

Inventory write-downs;

 

Goodwill and long-lived assets;

 

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. Historically, we had two reportable segments, Software & Subscription Services and Telematics Systems. During the first quarter of fiscal 2021, our interim President and Chief Executive Officer, who is our new Chief Operating Decision Maker (“CODM”), realigned our operational structure into three reportable segments: Software & Subscriptions Services, Telematics Products and LoJack U.S. SVR Products. Our organizational structure is based on a number of factors that our CEO, the CODM, uses to evaluate and operate the business, which include, but are not limited to, customer base, homogeneity of products, and technology within these three segments. A description of the reportable business segments is provided below.

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.

TELEMATICS PRODUCTS

 

Our Telematics Products segment offers a series of advanced telematics 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.

LOJACK U.S. SVR PRODUCTS

Our LoJack U.S. SVR Products segment offers a series of security and protection products and services for tracking and recovering vehicles. Our Stolen Vehicle Recovery (SVR) solution is the only one directly integrated with law enforcement that has a 90%+ recovery rate and over $1 billion worth of recoveries in the U.S. alone.

 

25


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 interim 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 16 to the accompanying condensed consolidated financial statements for additional information related to Adjusted EBITDA by reportable segments and reconciliation to net loss.

 

Recent Developments

 

In December 2019, a strain of coronavirus entitled COVID-19 emerged in China and spread to other countries including to the United States. In March 2020, the World Health Organization declared COVID-19 to be a public health pandemic of international concern, which has resulted in travel restrictions and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets.

 

In the United States and other geographies in which we and our customers, partners and service providers operate, the health concerns as well as political or governmental developments in response to COVID-19 could result in economic, social or labor instability or prolonged contractions in certain end markets which could slow the sales process, result in customers not purchasing or renewing on contracts or failing to make payments. These events could have a material adverse effect on the business and results of operations and financial condition.

 

Our business and operating results depend on telematics product sales, device installations and related subscription-based services. The outbreak has limited our ability to install devices in the three months ended May 31, 2020. The effect of the outbreak may continue to impact our operating results depending on the severity of the pandemic and the actions taken or to be taken by governments and private businesses in relation to its containment.

 

We have adopted several measures in response to the COVID-19 outbreak, including instructing employees to work from home, implementing certain cost and cash flow control measures to address potential declines in billings and cash collections from customers, shifting the manner in which we engage with customers and restricting non-critical business travel by our employees. As a result of the work and travel restrictions, substantially all of our sales and installation services activities are being conducted or managed remotely.

OPERATING RESULTS

Three months ended May 31, 2020 compared to three months ended May 31, 2019:

Revenue by Segment

 

 

Three Months Ended May 31,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

(In thousands)

$

 

 

% of Revenue

 

 

$

 

 

% of Revenue

 

 

$ Change

 

 

% Change

 

Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software & Subscription Services

$

28,029

 

 

 

34.9

%

 

$

25,511

 

 

 

28.6

%

 

$

2,518

 

 

 

9.9

%

Telematics Products

 

45,539

 

 

 

56.8

%

 

 

51,198

 

 

 

57.5

%

 

 

(5,659

)

 

 

(11.1

%)

LoJack U.S. SVR Products

 

6,647

 

 

 

8.3

%

 

 

12,361

 

 

 

13.9

%

 

 

(5,714

)

 

 

(46.2

%)

Total

$

80,215

 

 

 

100.0

%

 

$

89,070

 

 

 

100.0

%

 

$

(8,855

)

 

 

(9.9

%)

 

Software & Subscription Services revenue increased by $2.5 million or 9.9% for the three months ended May 31, 2020 compared to the same period last year. The increase was primarily due to revenue growth in fleet management and the acquired businesses such as Synovia and LoJack Mexico, but partially offset by decrease in revenue due to decline in device installation for business such as Italy as a result of COVID-19 pandemic.  

 

26


Telematics Products revenue decreased by $5.7 million or 11.1% for the three months ended May 31, 2020 compared to the same period last year. The decrease was attributable to reduced sale volume due to a decline in customer demand attributed to the COVID-19 outbreak in the U.S. in February 2020. The decrease in telematics products and OEM/Network products was primarily driven by a decline in demand for a portion of our smaller customers adversely impacted by market condition prompted by the pandemic. We expect this decline to be temporary and to be offset by customer demands in the second half of fiscal 2021 as the 3G network sunset becomes more imminent and the effects of COVID-19 pandemic diminishes.

 

LoJack U.S. SVR Products revenue decreased by $5.7 million or 46.2% for the three months ended May 31, 2020 compared to the same period last year. The decrease was due to a decline in customer demand attributed to the COVID-19 outbreak in the U.S. in February 2020 as well as a technology transition from proprietary radio frequency technology to GPS-based telematics solutions. We expect this decline to continue but to be partially offset over time by revenues growth in our telematics solutions, such as SureDrive and LotSmart within our Software & Subscription Services segment.

 

Gross Profit by Segment

 

 

Three Months Ended May 31,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

(In thousands)

$

 

 

% of Revenue

 

 

$

 

 

% of Revenue

 

 

$ Change

 

 

% Change

 

Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software & Subscription Services

$

13,815

 

 

 

49.3

%

 

$

10,400

 

 

 

40.8

%

 

$

3,415

 

 

 

32.8

%

Telematics Products

 

15,120

 

 

 

33.2

%

 

 

20,044

 

 

 

39.1

%

 

 

(4,924

)

 

 

(24.6

%)

LoJack U.S. SVR Products

 

2,118

 

 

 

31.9

%

 

 

4,967

 

 

 

40.2

%

 

 

(2,849

)

 

 

(57.4

%)

Gross profit

$

31,053

 

 

 

38.7

%

 

$

35,411

 

 

 

39.8

%

 

$

(4,358

)

 

 

(12.3

%)

 

Consolidated gross profit decreased by $4.4 million or 12.3% for the three months ended May 31, 2020 compared to the same period last year. Consolidated gross margin decreased by 110 basis for the three months ended May 31, 2020 compared to the same period last year. Both declines in consolidated gross profit and in consolidated gross margin were due to lower revenue in our Telematics Products and LoJack U.S. SVR Products businesses as a result of the COVID-19 pandemic and partially offset by continued growth in Software & Subscription Services as described above.

 

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 May 31,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

(In thousands)

$

 

 

% of Revenue

 

 

$

 

 

% of Revenue

 

 

$ Change

 

 

% Change

 

Research and development

$

6,324

 

 

 

7.9

%

 

$

6,886

 

 

 

7.7

%

 

$

(562

)

 

 

(8.2

%)

Selling and marketing

 

12,886

 

 

 

16.1

%

 

 

14,647

 

 

 

16.4

%

 

 

(1,761

)

 

 

(12.0

%)

General and administrative

 

13,669

 

 

 

17.0

%

 

 

17,484

 

 

 

19.6

%

 

 

(3,815

)

 

 

(21.8

%)

Intangible asset amortization

 

1,892

 

 

 

2.4

%

 

 

3,040

 

 

 

3.4

%

 

 

(1,148

)

 

 

(37.8

%)

Restructuring

 

1,908

 

 

 

2.4

%

 

 

-

 

 

 

0.0

%

 

 

1,908

 

 

 

100.0

%

Impairment loss

 

4,289

 

 

 

5.3

%

 

 

-

 

 

 

0.0

%

 

 

4,289

 

 

 

100.0

%

Total

$

40,968

 

 

 

51.1

%

 

$

42,057

 

 

 

47.1

%

 

$

(1,089

)

 

 

(2.6

%)

 

Consolidated research and development expense decreased by $0.6 million or 8.2% for the three months ended May 31, 2020 compared to the same period last year as we implemented certain cost containment measures in connection with the COVID-19 outbreak. 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 as market conditions improve.

Consolidated selling and marketing expense decreased by $1.8 million or 12.0% for the three months ended May 31, 2020 compared to the same period last year. The decrease was primarily driven by lower tradeshow and related travel and advertising expenses due to the COVID-19 pandemic coupled with lower sales commissions due to lower sales volume as described above. We will invest in additional headcounts in sales and marketing as we gain greater visibility into customer demand as the effects of the COVID-19 pandemic diminishes.

27


Consolidated general and administrative expenses decreased by $3.8 million or 21.8% for the three months ended May 31, 2020 compared to the same period last year. The decrease was primarily driven by lower professional fees related to certain non-recurring legal matters and acquisitions in fiscal 2020 and reduced expenses as we further integrate the acquired businesses.

As described in Note 8 to the accompanying condensed consolidated financial statements, during 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 partially vacant. We incurred additional charges for this initiative during the three months ended May 31, 2020, which was primarily personnel related. Restructuring costs are shown separately in the operating expenses in our condensed consolidated statement of comprehensive income (loss).

Amortization of intangibles decreased by $1.1 million or 37.8% for the three months ended May 31, 2020 compared to the same period last year due to reduced amortization as a result of the intangible assets impairment loss recorded in fiscal 2020.

In February 2020, we determined that the prolonged secular decline in revenues from our legacy LoJack US SVR Products coupled with the slower than anticipated market penetration of our telematics solutions in the U.S. automotive dealership channel represented determinate indications of impairment. These factors were further exacerbated by the immediate unfavorable impact that the COVID-19 pandemic has had on the automotive end markets since over the past four months. As a result, we updated our assessment of the carrying amount of goodwill and long-lived assets supporting these products. The total impairment loss we recorded for the three months ended May 31, 2020 was $4.3 million, which was primarily attributable to partial write-offs of intangible assets for LoJack U.S. dealer relationships and goodwill (see Notes 1 and 4 in the accompanying financial statements). Any deterioration in future operating cash flows of this reporting unit may result in further impairment of goodwill and other long-lived assets, including intangible assets.

Non-operating Income (Expense), Net

Investment income decreased by $2.1 million to $18 thousand for the three months ended May 31, 2020 from $2.1 million for the three months ended May 31, 2019. 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 and lower investment income due to decreased investments in various cash equivalent as a result of the repayment of our 2020 Convertible Notes and operating cash flows.

Interest expense decreased by $1.4 million to $4.1 million for the three months ended May 31, 2020 from $5.5 million for the three months ended May 31, 2019 primarily due to lower stated interest expense, amortization of debt discount and issue costs that resulted from the repurchase of approximately $94.9 million in aggregate principal amount of the 2020 Convertible Notes last year.

Other non-operating loss decreased by $0.2 million to $0.2 million for the three months ended May 31, 2020 from $0.4 million for the three months ended May 31, 2019 due to change in foreign currency exchange rates.

Overall Profitability Measures

Net Income (Loss):

GAAP-basis net loss in the three months ended May 31, 2020 was $14.4 million as compared to a net loss of $8.7 million in the three months ended May 31, 2019. The $5.7 million increase in the net loss is due to the impairment loss of $4.3 million and $4.4 million decrease in gross profit during the quarter and partially offset by lower operating expenses as described above.

Adjusted EBITDA:

 

 

Three Months Ended May 31,

 

 

 

 

 

(In thousands)

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software & Subscription Services

$

6,354

 

 

$

2,374

 

 

$

3,980

 

 

 

167.6

%

Telematics Products

 

3,123

 

 

 

7,863

 

 

 

(4,740

)

 

 

(60.3

%)

LoJack U.S. SVR Products

 

(1,573

)

 

 

(870

)

 

 

(703

)

 

 

80.8

%

Corporate Expenses

 

(1,397

)

 

 

(1,798

)

 

 

401

 

 

 

(22.3

%)

Total Adjusted EBITDA

$

6,507

 

 

$

7,569

 

 

$

(1,062

)

 

 

(14.0

%)

 

Adjusted EBITDA for Software & Subscription Services increased by $4.0 million compared to the same period last year primarily due to higher gross profit and lower operating expenses as we further integrate the acquired businesses. Adjusted EBITDA for Telematics Products and LoJack U.S. SVR Products in the three months ended May 31, 2020 decreased by $4.7 million and $0.7 million compared to the same period last year, respectively. The declines in both segments were primarily due to a decline in revenue resulting from decreased sales volume partially offset by operating expense savings as we implemented certain cost containment measures in connection with the COVID-19 pandemic as described above. Adjusted EBITDA for Corporate Expenses decreased due to lower legal expenses.

 

See Note 16 for information related to Adjusted EBITDA by reportable segments and a reconciliation to GAAP-basis net income (loss).

28


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.

An income tax expense of $0.2 million was recorded for the three months ended May 31, 2020, compared to an income tax benefit of $2.3 million in the same period last year. The $2.5 million increase in tax expense for the three months ended May 31, 2020, compared with the same period in 2019, was primarily driven by a pre-tax loss in the current period which did not result in an income tax benefit due to the recording of a valuation allowance against net deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

Consistent with fiscal 2020, 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 and cash equivalents, and our revolving credit facility. As of May 31, 2020, we have $104.1 million of cash and cash equivalents and $30 million available under our revolving credit facility. 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 JPMorgan Chase Bank, N.A. that provided for borrowings of up to $50 million. On March 27, 2020, we entered into an amendment of the revolving credit facility to extend the term to March 30, 2022. Borrowings under this revolving credit facility bear interest at either a Prime or LIBOR-based variable rate as selected by us on a periodic basis. 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. In May 2020, we borrowed $20 million under the revolving credit facility.

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 condensed consolidated results of operations, financial condition and cash flows.

See Note 17, 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 up to 90 days.

 

For the three months ended May 31, 2020, net cash provided by operating activities was $5.9 million and net loss was $14.4 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 $19.1 million. These non-cash expenses are partially offset by non-cash revenues of $1.7 million related to the Synovia revenue assignment arrangements. Changes in operating assets and liabilities generated in a $3.0 million cash inflow, primarily driven by changes in working capital including a decrease in accounts receivable and inventory, and an increase in accounts payable.  

 

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For the three months ended May 31, 2019, net cash used in operating activities was $5.6 million and net loss was $8.7 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 $10.4 million. Changes in operating assets and liabilities, net of the effects of our acquisitions, resulted in a $7.3 million cash outflow, primarily driven by changes in working capital including decreases in accounts payable and an increase in inventory, but partially offset by a decrease in accounts receivable.

Cash flow from investing activities

 

For the three months ended May 31, 2020 and 2019, our net cash used in investing activities was $3.1 million and $60.8 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 three months ended May 31, 2019, we also acquired Synovia and LoJack Mexico for $48.4 million and $14.7 million, net of cash acquired, respectively.

 

We expect that we will make additional capital expenditures in the future, including the devices that we lease to customers on the Synovia subscription agreements in order to support the future growth of our business.

Cash flow from financing activities

 

For the three months ended May 31, 2020 and 2019, our net cash used in financing activities was $7.7 million and $0.1 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 our employee stock purchase plan. During the three months ended May 31, 2020, we repaid our 2020 Convertible Notes of $27.6 million and borrowed $20.0 million from our revolving credit facility.

 

We continue to monitor the impact of COVID-19 on our operating results and liquidity as we believe the pandemic may have an unfavorable impact on our financial condition and results of operations. We have implemented certain cost containment and cash flow control measures especially in areas such as personnel, travel and other discretionary spend. As of May 31, 2020, we had cash and cash equivalents of $104 million and $30 million available under our existing revolving credit facility. Accordingly, we believe that our existing cash and cash equivalents, funds anticipated to be generated from our operations and available borrowing on our revolving credit facility will be sufficient to meet our working capital needs for at least the next 12 months.      

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 first quarter of fiscal 2021, 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 29, 2020 as filed with the Securities and Exchange Commission on May 5, 2020.

 

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 29, 2020 as filed with the U.S. Securities and Exchange Commission on May 5, 2020. 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 $3.1 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 May 31, 2020. 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 $0.2 million and $0.4 million for the three months ended May 31, 2020 and 2019, respectively.

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 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.

Loans outstanding under our revolving credit facility bear interest at either euro currency rate plus a margin or the base rate (highest of (i) 0%, (ii) the rate of interest publicly announced by the Agent as its prime rate in effect at its principal office in New York City, (iii) the overnight bank funding rate as determined by the Federal Reserve Bank of New York plus 0.50% and (iv) the LIBOR-based rate for a one-month interest period on such day plus 1%). An applicable margin is added based on the Company’s senior leverage ratio, ranging from 1.50% to 2.00% for base rate loans, and from 2.50% to 3.00% for Eurodollar loans. Changes in interest rate would impact our variable rate borrowings. As of May 31, 2020, outstanding borrowing under our revolving credit facility amounted $20.0 million which bears interest rate of 3.50%.

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. 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 first quarter of fiscal 2021 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 17, 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 29, 2020, as filed with the U.S. Securities and Exchange Commission on May 5, 2020, 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:

 

The Coronavirus (COVID-19) pandemic could have a material adverse impact on our business, results of operations and financial condition.

 

In December 2019, a novel strain of coronavirus disease (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The outbreak has spread globally, resulting in the implementation of significant governmental measures, including lockdowns, closures, quarantines and travel restrictions, intended to control the spread of the virus. The COVID-19 outbreak has already caused severe global disruptions.

 

Additionally, we, and other companies, are taking precautions, such as requiring employees to work remotely and imposing travel restrictions. These restrictions, and future prevention and mitigation measures, are likely to have an adverse impact on global economic conditions and consumer confidence and spending, which could materially adversely affect the supply and demand for our products and solutions. Uncertainties regarding the economic impact of COVID-19 is likely to result in sustained market turmoil, which could also negatively impact our business, financial condition and cash flows. For example, as a result of COVID-19, we have experienced lower sales of our LoJack U.S. SVR Products coupled with slower than anticipated market penetration of our telematics solutions in the U.S. automotive dealership channel. Further, this pandemic could negatively affect our ability to sell-through our backlog. Our ability to manage normal commercial relationships with our suppliers, contract manufacturers, and customers may suffer. Our customers could shift purchases to lower-priced or other perceived value offerings during the pandemic-caused economic downturn as a result of various factors, including workforce reductions, reduced access to credit, and changes in federal economic policy. In particular, customers may become more conservative in response to these conditions and seek to reduce their purchases and inventories. Our results of operations depend upon, among other things, our ability to maintain and increase sales volume with our existing customers, our ability to attract new consumers, and the financial condition of our customers. Decreases in demand for our products and solutions without a corresponding decrease in costs would put downward pressure on our margins and would negatively impact our financial results.

 

Governmental organizations, such as the U.S. Centers for Disease Control and Prevention and state and local governments, have recommended and/or imposed increased community-based interventions, including event cancellations, social distancing measures, and restrictions on gatherings of more than ten people. As discussed, significant government measures, including lockdowns, closures, quarantines and travel restrictions have been implemented and continue to be in effect, and in the future, government authorities may impose similar and/or additional restrictions on people’s movement, public gatherings and businesses. The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on our business. However, if the pandemic continues to evolve into a severe worldwide health crisis, the disease could have a material adverse effect on our business, results of operations, financial condition and cash flows and adversely impact the trading price of our common stock.

 

We are subject to risks associated with debt financing.

 

Our revolving credit facility contains, among other things, 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. While we have not previously breached and are not currently in breach of these or any other covenants contained in our credit agreement, there can be no guarantee that we will not breach these covenants in the future.

 

Additionally, our ability to comply with these covenants may be affected by events beyond our control, including the COVID-19 pandemic. A breach of any of these covenants could result in a default under the credit agreement and related credit documents, which could cause all of the outstanding indebtedness under our revolving credit facility to become immediately due and payable. These covenants could also limit our ability to seek capital through the incurrence of new indebtedness or, if we are unable to meet our obligations, require us to repay any outstanding amounts with sources of capital we may otherwise use to fund our business.

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ITEM 6. EXHIBITS

 

10.1

 

Second Amendment to Credit Agreement, dated March 27, 2020, among the Company, the lenders from time to time party thereto and JPMorgan as Agent (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated March 27, 2020).

 

 

 

10.2

 

Separation Agreement and General Release between CalAmp Corp. and Michael Burdiek dated March 20, 2020 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on March 25, 2020).

 

 

 

10.3

 

Letter Agreement between the Company and Jeffery Gardner dated March 23, 2020 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on March 25, 2020).

 

 

 

 

10.4

 

Amendment No. 1, dated May 1, 2020, to Letter Agreement between CalAmp Corp. and Jeffery Gardner dated March 23, 2020 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K/A filed on May, 4 2020).

 

 

 

10.5

 

Executive Employment Agreement between the Company and Kurtis Binder, effective May 31, 2020 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on June 3, 2020).

 

 

 

10.6

 

Employment Agreement between the Company and Arym Diamond, dated May 31, 2020.

 

 

 

10.7

 

Employment Agreement between the Company and Anand Rau, dated May 31, 2020.

 

 

 

10.8

 

CalAmp Corp. Amended and Restated 2018 Employee Stock Purchase Plan.

 

 

 

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.

 

 

 

June 25, 2020

 

/s/ Kurtis Binder

Date

 

EVP & Chief Financial Officer

 

 

(Principal Financial Officer and

Chief Accounting Officer)

 

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