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

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended November 30, 2019

or

 

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

For the transition period from          to          

COMMISSION FILE NUMBER: 0-12182

 

CALAMP CORP.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

95-3647070

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

15635 Alton Parkway, Suite 250

 

 

Irvine, California

 

92618

(Address of principal executive offices)

 

(Zip Code)

(949) 600-5600

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading symbol

Name of Each Exchange On Which Registered

Common stock, $0.01 per share

CAMP

Nasdaq Global Select Market

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

 

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

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

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

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

 


 

CALAMP CORP.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED NOVEMBER 30, 2019

TABLE OF CONTENTS

 

 

 

 

 

Page

Number

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial statements

 

3

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

 

 

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

 

4

 

 

 

 

 

 

 

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

 

5

 

 

 

 

 

 

 

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

 

6

 

 

 

 

 

 

 

Notes to unaudited condensed consolidated financial statements

 

7

 

 

 

 

 

ITEM 2.

 

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

 

26

 

 

 

 

 

ITEM 3.

 

Quantitative and qualitative disclosures about market risk

 

34

 

 

 

 

 

ITEM 4.

 

Controls and procedures

 

34

 

 

 

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

ITEM 1.

 

Legal proceedings

 

35

 

 

 

 

 

ITEM 1A.

 

Risk factors

 

35

 

 

 

 

 

ITEM 6.

 

Exhibits

 

36

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CALAMP CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

November 30,

 

 

February 28,

 

Assets

 

2019

 

 

2019

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101,634

 

 

$

256,500

 

Short-term marketable securities

 

 

1,926

 

 

 

17,512

 

Accounts receivable, net

 

 

83,462

 

 

 

78,079

 

Inventories

 

 

44,035

 

 

 

32,033

 

Prepaid expenses and other current assets

 

 

22,196

 

 

 

19,373

 

Total current assets

 

 

253,253

 

 

 

403,497

 

Property and equipment, net

 

 

57,127

 

 

 

27,023

 

Operating lease right-of-use assets

 

 

24,108

 

 

 

-

 

Deferred income tax assets

 

 

30,372

 

 

 

22,626

 

Goodwill

 

 

105,584

 

 

 

80,805

 

Other intangible assets, net

 

 

66,501

 

 

 

47,165

 

Other assets

 

 

25,466

 

 

 

22,510

 

 

 

$

562,411

 

 

$

603,626

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

32,955

 

 

$

-

 

Accounts payable

 

 

36,993

 

 

 

39,898

 

Accrued payroll and employee benefits

 

 

9,707

 

 

 

8,808

 

Deferred revenue

 

 

34,939

 

 

 

24,264

 

Other current liabilities

 

 

15,237

 

 

 

10,622

 

Total current liabilities

 

 

129,831

 

 

 

83,592

 

Long-term debt, net of current portion

 

 

176,378

 

 

 

275,905

 

Operating lease liabilities

 

 

27,090

 

 

 

-

 

Other non-current liabilities

 

 

38,459

 

 

 

38,476

 

Total liabilities

 

 

371,758

 

 

 

397,973

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

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

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

 

 

342

 

 

 

336

 

Additional paid-in capital

 

 

216,798

 

 

 

208,205

 

Accumulated deficit

 

 

(25,704

)

 

 

(2,227

)

Accumulated other comprehensive loss

 

 

(783

)

 

 

(661

)

Total stockholders' equity

 

 

190,653

 

 

 

205,653

 

 

 

$

562,411

 

 

$

603,626

 

 

See accompanying notes to condensed consolidated financial statements.

3


CALAMP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

63,192

 

 

$

67,571

 

 

$

188,782

 

 

$

221,461

 

Application subscriptions and related products and service

 

 

33,405

 

 

 

20,924

 

 

 

90,121

 

 

 

57,959

 

Total revenues

 

 

96,597

 

 

 

88,495

 

 

 

278,903

 

 

 

279,420

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

42,225

 

 

 

41,397

 

 

 

118,494

 

 

 

134,795

 

Application subscriptions and related products and service

 

 

17,488

 

 

 

10,717

 

 

 

50,444

 

 

 

30,332

 

Total cost of revenues

 

 

59,713

 

 

 

52,114

 

 

 

168,938

 

 

 

165,127

 

Gross profit

 

 

36,884

 

 

 

36,381

 

 

 

109,965

 

 

 

114,293

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,742

 

 

 

7,177

 

 

 

22,552

 

 

 

21,377

 

Selling and marketing

 

 

14,683

 

 

 

12,746

 

 

 

45,198

 

 

 

37,766

 

General and administrative

 

 

14,283

 

 

 

11,719

 

 

 

44,660

 

 

 

37,146

 

Restructuring

 

 

848

 

 

 

1,247

 

 

 

3,120

 

 

 

5,196

 

Intangible asset amortization

 

 

3,325

 

 

 

2,893

 

 

 

9,683

 

 

 

8,534

 

Total operating expenses

 

 

40,881

 

 

 

35,782

 

 

 

125,213

 

 

 

110,019

 

Operating income (loss)

 

 

(3,997

)

 

 

599

 

 

 

(15,248

)

 

 

4,274

 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

 

1,108

 

 

 

1,398

 

 

 

4,445

 

 

 

3,258

 

Interest expense

 

 

(4,987

)

 

 

(5,134

)

 

 

(15,998

)

 

 

(11,566

)

Gain on legal settlement

 

 

 

 

 

2,500

 

 

 

 

 

 

15,833

 

Loss on extinguishment of debt (see Note 7)

 

 

(2,408

)

 

 

 

 

 

(2,408

)

 

 

(2,033

)

Other income (expense)

 

 

232

 

 

 

(218

)

 

 

26

 

 

 

(721

)

Total non-operating income (expense)

 

 

(6,055

)

 

 

(1,454

)

 

 

(13,935

)

 

 

4,771

 

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

 

 

(10,052

)

 

 

(855

)

 

 

(29,183

)

 

 

9,045

 

Income tax benefit (provision)

 

 

2,637

 

 

 

778

 

 

 

6,236

 

 

 

(496

)

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

 

 

(7,415

)

 

 

(77

)

 

 

(22,947

)

 

 

8,549

 

Impairment loss and equity in net loss of affiliate

 

 

 

 

 

(445

)

 

 

(530

)

 

 

(1,414

)

Net income (loss)

 

$

(7,415

)

 

$

(522

)

 

$

(23,477

)

 

$

7,135

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.22

)

 

$

(0.02

)

 

$

(0.70

)

 

$

0.20

 

Diluted

 

$

(0.22

)

 

$

(0.02

)

 

$

(0.70

)

 

$

0.20

 

Shares used in computing earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33,822

 

 

 

34,561

 

 

 

33,589

 

 

 

34,950

 

Diluted

 

 

33,822

 

 

 

34,561

 

 

 

33,589

 

 

 

35,769

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(7,415

)

 

$

(522

)

 

$

(23,477

)

 

$

7,135

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1,165

 

 

 

(29

)

 

 

(122

)

 

 

(12

)

Total comprehensive income (loss)

 

$

(6,250

)

 

$

(551

)

 

$

(23,599

)

 

$

7,123

 

 

See accompanying notes to condensed consolidated financial statements.

4


CALAMP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

November 30,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(23,477

)

 

$

7,135

 

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

 

 

 

 

 

 

 

 

Depreciation expense

 

 

14,054

 

 

 

6,602

 

Intangible asset amortization expense

 

 

9,683

 

 

 

8,534

 

Stock-based compensation expense

 

 

9,378

 

 

 

8,088

 

Amortization of discount and debt issuance costs

 

 

11,031

 

 

 

7,999

 

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

 

 

1,210

 

 

 

 

Noncash operating lease cost

 

 

3,440

 

 

 

 

Loss on extinguishment of debt

 

 

2,408

 

 

 

2,033

 

Revenue assigned to factors

 

 

(5,016

)

 

 

 

Deferred tax assets, net

 

 

(5,701

)

 

 

(716

)

Impairment loss and equity in net loss of affiliate

 

 

530

 

 

 

1,414

 

Tax benefits on vested and exercised equity awards

 

 

 

 

 

591

 

Other

 

 

812

 

 

 

691

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,145

)

 

 

(1,005

)

Inventories

 

 

(5,747

)

 

 

4,454

 

Prepaid expenses and other assets

 

 

(1,853

)

 

 

(5,222

)

Accounts payable

 

 

(7,652

)

 

 

(3,826

)

Accrued liabilities

 

 

(1,805

)

 

 

6,716

 

Deferred revenue

 

 

3,797

 

 

 

4,605

 

Operating lease liabilities

 

 

(644

)

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

3,303

 

 

 

48,093

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from maturities of marketable securities

 

 

35,129

 

 

 

36,461

 

Purchases of marketable securities

 

 

(19,543

)

 

 

(43,103

)

Capital expenditures

 

 

(17,637

)

 

 

(8,884

)

Acquisitions, net of cash acquired

 

 

(60,634

)

 

 

 

Advances to affiliate

 

 

(530

)

 

 

(1,519

)

Other

 

 

901

 

 

 

(103

)

NET CASH USED IN INVESTING ACTIVITIES

 

 

(62,314

)

 

 

(17,148

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of 2025 Convertible Notes

 

 

 

 

 

230,000

 

Payment of debt issuance costs of 2025 Convertible Notes

 

 

 

 

 

(7,305

)

Purchase of capped call on 2025 Convertible Notes

 

 

 

 

 

(21,160

)

Repurchase of 2020 Convertible Notes

 

 

(94,683

)

 

 

(53,683

)

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

 

 

 

 

 

3,122

 

Repurchases of common stock

 

 

 

 

 

(39,000

)

Taxes paid related to net share settlement of vested equity awards

 

 

(1,827

)

 

 

(3,520

)

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

 

 

1,048

 

 

 

124

 

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

 

 

(95,462

)

 

 

108,578

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

(393

)

 

 

(513

)

Net change in cash and cash equivalents

 

 

(154,866

)

 

 

139,010

 

Cash and cash equivalents at beginning of period

 

 

256,500

 

 

 

132,603

 

Cash and cash equivalents at end of period

 

$

101,634

 

 

$

271,613

 

 

See accompanying notes to condensed consolidated financial statements.

5


CALAMP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

November 30,

 

 

November 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Total stockholders' equity, beginning balances

$

193,296

 

 

$

209,736

 

 

$

205,653

 

 

$

198,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and additional paid-in capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balances

 

213,533

 

 

 

223,329

 

 

 

208,541

 

 

 

218,574

 

Equity component of 2025 Convertible Notes, net of tax

 

 

 

 

 

 

 

 

 

 

51,902

 

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

 

 

 

 

 

 

 

 

 

 

(15,870

)

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

 

 

 

 

 

 

 

 

 

 

(1,649

)

Equity component of the repurchased 2020 Convertible Notes

 

 

 

 

 

 

 

 

 

 

(6,088

)

Unwind of note hedges and warrants of 2020 Convertible Notes

 

 

 

 

 

 

 

 

 

 

3,122

 

Stock-based compensation expense

 

3,652

 

 

 

2,941

 

 

 

9,378

 

 

 

8,088

 

Shares issued on net share settlement of equity awards

 

(98

)

 

 

(174

)

 

 

(1,827

)

 

 

(3,520

)

Exercise of stock options and contributions to ESPP

 

53

 

 

 

23

 

 

 

1,048

 

 

 

124

 

Repurchases of common stock

 

 

 

 

(10,436

)

 

 

 

 

 

(39,000

)

Ending balances

 

217,140

 

 

 

215,683

 

 

 

217,140

 

 

 

215,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balances

 

(18,289

)

 

 

(12,963

)

 

 

(2,227

)

 

 

(19,459

)

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

 

 

 

 

 

 

 

 

 

 

434

 

Cumulative adjustment upon adoption of ASC 606, net of tax

 

 

 

 

 

 

 

 

 

 

(1,595

)

Net income (loss)

 

(7,415

)

 

 

(522

)

 

 

(23,477

)

 

 

7,135

 

Ending balances

 

(25,704

)

 

 

(13,485

)

 

 

(25,704

)

 

 

(13,485

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balances

 

(1,948

)

 

 

(630

)

 

 

(661

)

 

 

(199

)

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

 

 

 

 

 

 

 

 

 

 

(434

)

Other comprehensive income (loss), net of tax

 

1,165

 

 

 

(15

)

 

 

(122

)

 

 

(12

)

Ending balances

 

(783

)

 

 

(645

)

 

 

(783

)

 

 

(645

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders' equity, ending balances

$

190,653

 

 

$

201,553

 

 

$

190,653

 

 

$

201,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


CALAMP CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED NOVEMBER 30, 2019 AND 2018

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

Description of Business

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

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

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

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

All intercompany transactions and accounts have been eliminated in consolidation.

Revenue Recognition and related judgments

We recognize revenue as follows:

 

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

 

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

 

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

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

 

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

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

 

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

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

November 30,

 

 

November 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue by type of goods and services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telematics devices and accessories

$

66,281

 

 

$

68,417

 

 

$

200,340

 

 

$

228,698

 

Professional services

 

3,741

 

 

 

4,672

 

 

 

7,724

 

 

 

7,354

 

Recurring application subscriptions

 

26,575

 

 

 

15,406

 

 

 

70,839

 

 

 

43,368

 

Total

$

96,597

 

 

$

88,495

 

 

$

278,903

 

 

$

279,420

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

November 30,

 

 

November 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue by timing of revenue recognition:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue recognized at a point in time

$

66,281

 

 

$

68,417

 

 

$

200,340

 

 

$

228,698

 

Revenue recognized over time

 

30,316

 

 

 

20,078

 

 

 

78,563

 

 

 

50,722

 

Total

$

96,597

 

 

$

88,495

 

 

$

278,903

 

 

$

279,420

 

 

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

 

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

 

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Business Combinations

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

Cash and Cash Equivalents

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

Accounts Receivable and Allowance for Doubtful Accounts

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

Impairment of Goodwill and Other Long-Lived Assets

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

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

Fair Value Measurements

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

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

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

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

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Convertible Senior Notes and Capped Call Transactions

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

Patent Litigation and Other Contingencies

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

Foreign Currency Translation

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

 

Recently Issued Accounting Standards

 

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

 

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

 

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

 

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

 

NOTE 2 – ACQUISITIONS

 

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

 

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

 

 

 

Tracker UK

 

 

LoJack Mexico

 

 

Synovia

 

Purchase price

 

 

 

 

 

$

13,097

 

 

 

 

 

 

$

14,306

 

 

 

 

 

 

$

29,500

 

Add debt paid at closing

 

 

 

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

20,296

 

Less cash acquired

 

 

 

 

 

 

(66

)

 

 

 

 

 

 

(1,586

)

 

 

 

 

 

 

(905

)

Net cash paid