NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED AUGUST 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 President and Chief Executive Officer (the “CEO”), who is our current 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 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 remains uncertain as of the time of this report given the diversity of rules and regulations in the U.S. and other countries in which we operate. The pandemic has resulted in travel restrictions, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. During the three months ended August 31, 2020, there was an increase in the number of installations as U.S. auto dealerships and school districts reopened from government-imposed pandemic shutdowns, which resulted in a sequential increase in our revenue since first quarter of fiscal 2021. 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 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 August 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 (“SEC”) 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 August 31, 2020 and our results of operations for the three and six months ended August 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 ending February 28, 2021.
All intercompany transactions and accounts have been eliminated in consolidation.
Revenue Recognition
We recognize revenue as follows:
Products. We recognize revenue from product and accessories 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.
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 (which we are exiting) 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. 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 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 and installation services, 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 August 31, 2020, we recognized $23.8 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 $4.1 million as of August 31, 2020, of which $2.2 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 15 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
|
|
|
Six Months Ended
|
|
|
August 31,
|
|
|
August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue by type of goods and services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telematics devices and accessories
|
$
|
50,943
|
|
|
$
|
64,174
|
|
|
$
|
104,049
|
|
|
$
|
129,937
|
|
Rental income and other services
|
|
5,976
|
|
|
|
5,750
|
|
|
|
8,413
|
|
|
|
10,180
|
|
Recurring application subscriptions
|
|
26,618
|
|
|
|
23,312
|
|
|
|
51,290
|
|
|
|
42,189
|
|
Total
|
$
|
83,537
|
|
|
$
|
93,236
|
|
|
$
|
163,752
|
|
|
$
|
182,306
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
August 31,
|
|
|
August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue by timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue recognized at a point in time
|
$
|
56,647
|
|
|
$
|
68,921
|
|
|
$
|
111,874
|
|
|
$
|
138,205
|
|
Revenue recognized over time
|
|
26,890
|
|
|
|
24,315
|
|
|
|
51,878
|
|
|
|
44,101
|
|
Total
|
$
|
83,537
|
|
|
$
|
93,236
|
|
|
$
|
163,752
|
|
|
$
|
182,306
|
|
8
Telematics devices and accessories 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 August 31, 2020 and February 29, 2020, we have estimated remaining performance obligations for contractually committed revenues of $129.8 million and $134.5 million, respectively. As of August 31, 2020, we expect to recognize approximately 25% in fiscal 2021 and 39% 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 August 31, 2019
|
|
|
Six Months Ended August 31, 2019
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Corrected
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Corrected
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
62,031
|
|
|
$
|
2,143
|
|
|
$
|
64,174
|
|
|
$
|
125,590
|
|
|
$
|
4,347
|
|
|
$
|
129,937
|
|
Application subscriptions and other services
|
|
31,205
|
|
|
|
(2,143
|
)
|
|
|
29,062
|
|
|
|
56,716
|
|
|
|
(4,347
|
)
|
|
|
52,369
|
|
Total revenues
|
$
|
93,236
|
|
|
$
|
-
|
|
|
$
|
93,236
|
|
|
$
|
182,306
|
|
|
$
|
-
|
|
|
$
|
182,306
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
37,721
|
|
|
$
|
562
|
|
|
$
|
38,283
|
|
|
$
|
76,269
|
|
|
$
|
1,820
|
|
|
$
|
78,089
|
|
Application subscriptions and other services
|
|
17,845
|
|
|
|
(562
|
)
|
|
|
17,283
|
|
|
|
32,956
|
|
|
|
(1,820
|
)
|
|
|
31,136
|
|
Total cost of revenues
|
$
|
55,566
|
|
|
$
|
-
|
|
|
$
|
55,566
|
|
|
$
|
109,225
|
|
|
$
|
-
|
|
|
$
|
109,225
|
|
|
Three Months Ended August 31, 2019
|
|
|
Six Months Ended August 31, 2019
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Corrected
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Corrected
|
|
Revenue by type of goods and services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telematics devices and accessories
|
$
|
65,891
|
|
|
$
|
(1,717
|
)
|
|
$
|
64,174
|
|
|
$
|
134,059
|
|
|
$
|
(4,122
|
)
|
|
$
|
129,937
|
|
Rental income and other services
|
|
2,036
|
|
|
|
3,714
|
|
|
|
5,750
|
|
|
|
3,983
|
|
|
|
6,197
|
|
|
|
10,180
|
|
Recurring application subscriptions
|
|
25,309
|
|
|
|
(1,997
|
)
|
|
|
23,312
|
|
|
|
44,264
|
|
|
|
(2,075
|
)
|
|
|
42,189
|
|
Total
|
$
|
93,236
|
|
|
$
|
-
|
|
|
$
|
93,236
|
|
|
$
|
182,306
|
|
|
$
|
-
|
|
|
$
|
182,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue recognized at a point in time
|
$
|
65,891
|
|
|
$
|
3,030
|
|
|
$
|
68,921
|
|
|
$
|
134,059
|
|
|
$
|
4,146
|
|
|
$
|
138,205
|
|
Revenue recognized over time
|
|
27,345
|
|
|
|
(3,030
|
)
|
|
|
24,315
|
|
|
|
48,247
|
|
|
|
(4,146
|
)
|
|
|
44,101
|
|
Total
|
$
|
93,236
|
|
|
$
|
-
|
|
|
$
|
93,236
|
|
|
$
|
182,306
|
|
|
$
|
-
|
|
|
$
|
182,306
|
|
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.
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 15, 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 effective March 1, 2020, 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 $3.7 million and $3.1 million as of August 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 carrying value, including goodwill. If the estimated fair value exceeds carrying value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than carrying value, then an impairment loss is recognized in an amount equal to the amount that the carrying 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 continued to impact the market and our business operations during the first quarter of fiscal 2021, we reevaluated the recoverability of the carrying amount of long-lived assets, including goodwill. 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 and recorded an impairment loss of $3.9 million for goodwill and $0.4 million for dealer relationships as of May 31, 2020. For the fiscal quarter ended August 31, 2020, we continued our assessment of these conditions and concluded no further impairment was required. 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 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 $0.9 million and $(0.8) million for the three and six months ended August 31, 2020, respectively. The aggregate foreign currency transaction exchange rate losses included in determining income (loss) before income taxes was $1.0 million and $1.3 million for the three and six months ended August 31, 2019, respectively.
Other Comprehensive Income (Loss)
11
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.
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 six months ended August 31, 2020, which are included in prepaid expenses and other current assets on our condensed consolidated balance sheets, were not material.
NOTE 2 – CASH, CASH EQUIVALENTS AND INVESTMENTS
The following tables summarize our financial instrument assets (in thousands):
|
As of August 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Fair Value
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Cash and
|
|
|
|
|
|
|
Adjusted
|
|
|
Gains
|
|
|
Fair
|
|
|
Cash
|
|
|
Other
|
|
|
Cost
|
|
|
(Losses)
|
|
|
Value
|
|
|
Equivalents
|
|
|
Assets
|
|
Cash
|
$
|
31,357
|
|
|
$
|
—
|
|
|
$
|
31,357
|
|
|
$
|
31,357
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
75,788
|
|
|
|
—
|
|
|
|
75,788
|
|
|
|
75,788
|
|
|
|
—
|
|
Mutual funds (1)
|
|
2,140
|
|
|
|
191
|
|
|
|
2,331
|
|
|
|
—
|
|
|
|
2,331
|
|
Total
|
$
|
109,285
|
|
|
$
|
191
|
|
|
$
|
109,476
|
|
|
$
|
107,145
|
|
|
$
|
2,331
|
|
|
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 an irrevocable “Rabbi Trust” 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 August 31, 2020, the cash surrender value of COLI was $4.2 million.
|
12
NOTE 3 - INVENTORIES
Inventories consist of the following (in thousands):
|
August 31,
|
|
|
February 29,
|
|
|
2020
|
|
|
2020
|
|
Raw materials
|
$
|
14,082
|
|
|
$
|
18,118
|
|
Finished goods
|
|
17,413
|
|
|
|
18,660
|
|
|
$
|
31,495
|
|
|
$
|
36,778
|
|
NOTE 4 – 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
|
|
|
Aug. 31,
2020
|
|
|
Feb. 29,
2020
|
|
|
Expense
|
|
|
Aug. 31,
2020
|
|
|
Feb. 29,
2020
|
|
|
Aug. 31,
2020
|
|
Developed technology
|
|
2-7 years
|
|
$
|
27,363
|
|
|
|
56
|
|
|
|
—
|
|
|
$
|
27,419
|
|
|
$
|
21,437
|
|
|
$
|
1,511
|
|
|
$
|
22,948
|
|
|
$
|
5,926
|
|
|
$
|
4,471
|
|
Tradenames
|
|
10 years
|
|
|
30,093
|
|
|
|
81
|
|
|
|
—
|
|
|
|
30,174
|
|
|
|
16,303
|
|
|
|
1,059
|
|
|
|
17,362
|
|
|
|
13,790
|
|
|
|
12,812
|
|
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
|
|
|
|
(527
|
)
|
|
|
(365
|
)
|
|
|
33,247
|
|
|
|
10,753
|
|
|
|
1,098
|
|
|
|
11,851
|
|
|
|
23,386
|
|
|
|
21,396
|
|
Patents
|
|
5 years
|
|
|
589
|
|
|
|
—
|
|
|
|
—
|
|
|
|
589
|
|
|
|
197
|
|
|
|
20
|
|
|
|
217
|
|
|
|
392
|
|
|
|
372
|
|
|
|
|
|
$
|
117,488
|
|
|
$
|
(390
|
)
|
|
$
|
(365
|
)
|
|
$
|
116,733
|
|
|
$
|
71,593
|
|
|
$
|
3,736
|
|
|
$
|
75,329
|
|
|
$
|
45,895
|
|
|
$
|
41,404
|
|
(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 generated 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 first quarter of fiscal 2021. For the three months ended August 31, 2020, we continued our assessment of these conditions and concluded no further impairment was required.
Estimated future amortization expense as of August 31, 2020 is as follows (in thousands):
2021 (remainder)
|
|
$
|
3,895
|
|
2022
|
|
|
5,830
|
|
2023
|
|
|
5,610
|
|
2024
|
|
|
4,498
|
|
2025
|
|
|
4,374
|
|
Thereafter
|
|
|
17,197
|
|
|
|
$
|
41,404
|
|
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
|
|
(249
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(249
|
)
|
Balance as of August 31, 2020
|
$
|
54,883
|
|
|
$
|
39,180
|
|
|
$
|
8,099
|
|
|
$
|
102,162
|
|
There was no impairment of goodwill as of February 29, 2020. As the COVID-19 pandemic continues to impact the market and our business operations during the first quarter of fiscal 2021, we reevaluated the recoverability of the carrying amount of long-lived assets,
13
including goodwill. 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 and recorded an impairment loss of $3.9 million as of May 31, 2020. For the three months ended August 31, 2020, we continued our assessment of these conditions and concluded no further impairment was required. 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 5 – OTHER ASSETS
Other assets consist of the following (in thousands):
|
August 31,
|
|
|
February 29,
|
|
|
2020
|
|
|
2020
|
|
Deferred cost
|
$
|
6,114
|
|
|
$
|
7,818
|
|
Deferred compensation plan assets
|
|
6,494
|
|
|
|
6,041
|
|
Lease receivables, non-current
|
|
7,830
|
|
|
|
5,992
|
|
Prepaid commissions
|
|
2,191
|
|
|
|
2,318
|
|
Other
|
|
2,403
|
|
|
|
2,599
|
|
|
$
|
25,032
|
|
|
$
|
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 6 – FINANCING ARRANGEMENTS
The following table provides a summary of our debt as of August 31, 2020 and February 29, 2020 (in thousands):
|
Maturity
|
|
Effective
|
|
|
August 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
|
|
|
|
|
|
|
|
(58,161
|
)
|
|
|
(61,763
|
)
|
Less: Current portion of long-term term debt
|
|
|
|
|
|
|
|
(5,184
|
)
|
|
|
(33,119
|
)
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
$
|
199,282
|
|
|
$
|
177,088
|
|
The effective interest rates for the convertible notes include the interest on the notes and amortization of the discount. As of August 31, 2020 and February 29, 2020, the fair value of the 2025 Convertible Notes was $191 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 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.
14
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 JP Morgan Chase Bank, N.A. 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 August 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 August 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 the three months ended August 31, 2020 and 2019, we recognized $0.1 million and $0.2 million of interest expense related to this debt, respectively. During both the six months ended August 31, 2020 and 2019, we recognized $0.3 million of interest expense related to this debt. The revenues recognized from this arrangement of $3.3 million and $3.1 million were considered a non-cash activity in our condensed consolidated statements of cash flows for the six months ended August 31, 2020 and 2019, respectively.
NOTE 7 – 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 $14.9 million, comprised of $9.1 million in severance and employee related costs, and $5.8 million for vacant office and manufacturing facility space. Restructuring charges related to vacant office and manufacturing facility space were 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 has been reclassified as a reduction of the Operating lease right-of-use assets in our condensed consolidated balance sheet.
15
For the three and six months ended August 31, 2020, total restructuring charges were $0.6 million and $2.5 million, respectively. Total restructuring charges incurred to date in fiscal 2021 were comprised of $2.3 million in severance and employee related costs, which included $0.9 million stock-based compensation, and $0.2 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 August 31, 2020 and February 29, 2020.
The following table summarizes the charges resulting from the implementation of the restructuring plan (in thousands):
|
Three months ended August 31, 2020
|
|
|
Three months ended August 31, 2019
|
|
|
Personnel
|
|
|
Facilities
|
|
|
Total
|
|
|
Personnel
|
|
|
Facilities
|
|
|
Total
|
|
Cost of revenue
|
$
|
397
|
|
|
$
|
71
|
|
|
$
|
468
|
|
|
$
|
349
|
|
|
$
|
1,210
|
|
|
$
|
1,559
|
|
Selling and marketing
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
447
|
|
|
|
-
|
|
|
|
447
|
|
General and administrative
|
|
83
|
|
|
|
-
|
|
|
|
83
|
|
|
|
266
|
|
|
|
-
|
|
|
|
266
|
|
Total
|
$
|
480
|
|
|
$
|
71
|
|
|
$
|
551
|
|
|
$
|
1,062
|
|
|
$
|
1,210
|
|
|
$
|
2,272
|
|
|
Six months ended August 31, 2020
|
|
|
Six months ended August 31, 2019
|
|
|
Personnel
|
|
|
Facilities
|
|
|
Total
|
|
|
Personnel
|
|
|
Facilities
|
|
|
Total
|
|
Cost of revenue
|
$
|
273
|
|
|
$
|
174
|
|
|
$
|
447
|
|
|
$
|
349
|
|
|
$
|
1,210
|
|
|
$
|
1,559
|
|
Selling and marketing
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
|
|
447
|
|
|
|
-
|
|
|
|
447
|
|
General and administrative
|
|
1,982
|
|
|
|
-
|
|
|
|
1,982
|
|
|
|
266
|
|
|
|
-
|
|
|
|
266
|
|
Total
|
$
|
2,285
|
|
|
$
|
174
|
|
|
$
|
2,459
|
|
|
$
|
1,062
|
|
|
$
|
1,210
|
|
|
$
|
2,272
|
|
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
|
|
2,285
|
|
|
|
174
|
|
|
|
2,459
|
|
Payments
|
|
(1,848
|
)
|
|
|
(448
|
)
|
|
|
(2,296
|
)
|
Restructuring liabilities as of August 31, 2020
|
$
|
2,820
|
|
|
$
|
85
|
|
|
$
|
2,905
|
|
NOTE 8 – 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.
During the second quarter of fiscal 2021, we sublet one of our office facilities in Texas and vacated the facility entirely. As a result, we recorded an impairment of our operating lease right-of-use assets and other property and equipment of $0.2 million and $0.1 million, respectively. These impairment losses are included within the total Impairment loss shown in the operating expenses in our condensed consolidated statements of comprehensive loss.
The table below presents lease-related assets and liabilities recorded on the condensed consolidated balance sheet (in thousands):
|
|
Classification
|
|
August 31, 2020
|
|
Assets
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
Operating lease right-of-use assets
|
|
$
|
23,428
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Operating lease liabilities (current)
|
|
Other current liabilities
|
|
$
|
6,201
|
|
Operating lease liabilities (noncurrent)
|
|
Operating lease liabilities
|
|
|
25,225
|
|
Total lease liabilities
|
|
|
|
$
|
31,426
|
|
|
|
|
|
|
|
|
16
Lease Costs
The following lease costs were included in our condensed consolidated statements of comprehensive loss as follows (in thousands):
|
For the Three Months
Ended August 31,
|
|
|
For the Six Months
Ended August 31,
|
|
|
2020
|
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
2019
|
|
Operating lease cost
|
$
|
1,837
|
|
|
|
|
$
|
1,972
|
|
|
$
|
3,426
|
|
|
|
|
$
|
3,973
|
|
Short-term lease cost
|
|
82
|
|
|
|
|
|
252
|
|
|
|
163
|
|
|
|
|
|
564
|
|
Variable lease cost
|
|
114
|
|
|
|
|
|
43
|
|
|
|
228
|
|
|
|
|
|
73
|
|
Total lease cost
|
$
|
2,033
|
|
|
|
|
$
|
2,267
|
|
|
$
|
3,817
|
|
|
|
|
$
|
4,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information
The table below presents supplemental information related to operating leases during the six months ended August 31, 2020 (in thousands, except weighted-average information):
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
$
|
3,605
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
5,425
|
|
Weighted average remaining lease term
|
|
6.48
|
|
Weighted average discount rate
|
|
|
5.17
|
%
|
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of August 31, 2020 (in thousands):
Remainder of 2021
|
|
$
|
4,348
|
|
2022
|
|
|
7,106
|
|
2023
|
|
|
6,588
|
|
2024
|
|
|
4,891
|
|
2025
|
|
|
3,113
|
|
Thereafter
|
|
|
10,057
|
|
Total minimum lease payments
|
|
|
36,103
|
|
Less imputed interest
|
|
|
(4,677
|
)
|
Present value of future minimum lease payments
|
|
|
31,426
|
|
Less current obligations under leases
|
|
|
(6,201
|
)
|
Long-term lease obligations
|
|
$
|
25,225
|
|
NOTE 9 - 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 and changes in valuation allowances. The income tax expense of $0.3 million and $0.5 million for the three and six months ended August 31, 2020, respectively, was primarily attributable to one of our foreign subsidiaries. The income tax benefit associated with the pre-tax loss for the quarter ended August 31, 2020, which was primarily from the U.S. jurisdiction, was offset by a full valuation allowance.
NOTE 10 - 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
17
number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and restricted stock-based awards using the treasury stock method.
The calculation of the basic and diluted loss per share of common stock is as follows (in thousands, except per share value):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
August 31,
|
|
|
August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net loss
|
$
|
(9,478
|
)
|
|
$
|
(7,369
|
)
|
|
$
|
(23,900
|
)
|
|
$
|
(16,062
|
)
|
Basic and diluted weighted average number of common shares outstanding
|
|
34,256
|
|
|
|
33,568
|
|
|
|
34,140
|
|
|
|
33,475
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.28
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(0.48
|
)
|
Diluted
|
$
|
(0.28
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(0.48
|
)
|
All outstanding options and restricted stock units for the three and six months ended August 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 11 – STOCKHOLDERS’ EQUITY
Stock-based compensation expense is included in the following captions of the condensed consolidated statements of comprehensive loss (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
August 31,
|
|
|
August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cost of revenues
|
$
|
203
|
|
|
$
|
162
|
|
|
$
|
378
|
|
|
$
|
337
|
|
Research and development
|
|
723
|
|
|
|
633
|
|
|
|
1,369
|
|
|
|
1,046
|
|
Selling and marketing
|
|
760
|
|
|
|
982
|
|
|
|
1,265
|
|
|
|
1,651
|
|
General and administrative
|
|
1,160
|
|
|
|
1,406
|
|
|
|
2,582
|
|
|
|
2,692
|
|
Restructuring
|
|
-
|
|
|
|
-
|
|
|
|
875
|
|
|
|
-
|
|
|
$
|
2,846
|
|
|
$
|
3,183
|
|
|
$
|
6,469
|
|
|
$
|
5,726
|
|
Changes in our outstanding stock options during the six months ended August 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
|
|
(70
|
)
|
|
|
4.03
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
(152
|
)
|
|
|
17.52
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2020
|
|
849
|
|
|
$
|
15.02
|
|
|
|
6.0
|
|
|
$
|
309
|
|
Exercisable at August 31, 2020
|
|
578
|
|
|
$
|
14.37
|
|
|
|
5.1
|
|
|
$
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Changes in our outstanding restricted stock shares, performance stock units (“PSUs”) and restricted stock units (“RSUs”) during the six months ended August 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
|
|
1,778
|
|
|
|
7.86
|
|
|
|
|
|
Vested
|
|
(611
|
)
|
|
|
14.97
|
|
|
|
199
|
|
Forfeited
|
|
(152
|
)
|
|
|
13.46
|
|
|
|
|
|
Outstanding at August 31, 2020
|
|
3,230
|
|
|
$
|
10.78
|
|
|
|
|
|
As of August 31, 2020, there was $29.5 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 3.7 years.
NOTE 12 - 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 customer in the heavy equipment industry accounted for 16% and 15% of our consolidated revenue for the three and six months ended August 31, 2020, respectively, and 10% and 12% of our consolidated revenue for the three and six months ended August 31, 2019, respectively. The same customer accounted for 16% and 19% of our consolidated accounts receivable at August 31, 2020 and February 29, 2020, respectively.
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 and six months ended August 31, 2020, four of our suppliers accounted for approximately 54% and 58% of our total inventory purchases, respectively. For the three and six months ended August 31, 2019, three of our suppliers accounted for approximately 51% and 48% of total inventory purchases, respectively. As identified below, some of these manufacturers accounted for more than 10% of our accounts payable as follows (rounded):
|
August 31,
|
|
|
February 29,
|
|
|
2020
|
|
|
2020
|
|
Accounts payable:
|
|
|
|
|
|
|
|
Supplier A
|
|
14
|
%
|
|
|
11
|
%
|
Supplier B
|
|
9
|
%
|
|
|
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.
19
NOTE 13 - 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. During the three months ended August 31, 2020, we recorded $1.4 million in the resolution of a product performance matter with a customer. 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):
|
Six Months Ended
|
|
|
August 31,
|
|
|
2020
|
|
|
2019
|
|
Balance at beginning of period
|
$
|
987
|
|
|
$
|
1,399
|
|
Charged to costs and expenses
|
|
1,995
|
|
|
|
1,100
|
|
Deductions
|
|
(518
|
)
|
|
|
(700
|
)
|
Balance at end of period
|
$
|
2,464
|
|
|
$
|
1,799
|
|
NOTE 14 – OTHER FINANCIAL INFORMATION
Supplemental Balance Sheet Information
Other current liabilities consist of the following (in thousands):
|
August 31,
|
|
|
February 29,
|
|
|
2020
|
|
|
2020
|
|
Operating lease liabilities
|
$
|
6,201
|
|
|
$
|
4,662
|
|
Taxes payable
|
|
2,476
|
|
|
|
2,266
|
|
Warranty reserves
|
|
2,464
|
|
|
|
987
|
|
Customer deposit
|
|
2,331
|
|
|
|
1,377
|
|
Litigation reserve
|
|
2,200
|
|
|
|
1,500
|
|
Interest payable
|
|
365
|
|
|
|
481
|
|
Other (1)
|
|
4,982
|
|
|
|
4,880
|
|
|
$
|
21,019
|
|
|
$
|
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):
|
August 31,
|
|
|
February 29,
|
|
|
2020
|
|
|
2020
|
|
Deferred revenue
|
$
|
25,104
|
|
|
$
|
27,452
|
|
Deferred compensation plan liability
|
|
6,542
|
|
|
|
5,919
|
|
Other
|
|
3,384
|
|
|
|
1,673
|
|
|
$
|
35,030
|
|
|
$
|
35,044
|
|
20
Supplemental Statement of Comprehensive Loss Information
Interest expense consists of the following (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
August 31,
|
|
|
August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Interest expense on 2020 Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated interest at 1.625% per annum
|
$
|
-
|
|
|
$
|
498
|
|
|
$
|
93
|
|
|
$
|
996
|
|
Amortization of discount and issue costs
|
|
-
|
|
|
|
1,495
|
|
|
|
289
|
|
|
|
2,951
|
|
|
|
-
|
|
|
|
1,993
|
|
|
|
382
|
|
|
|
3,947
|
|
Interest expense on 2025 Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated interest at 2.00% per annum
|
|
1,150
|
|
|
|
1,150
|
|
|
|
2,313
|
|
|
|
2,326
|
|
Amortization of discount and issue costs
|
|
2,329
|
|
|
|
2,160
|
|
|
|
4,640
|
|
|
|
4,328
|
|
|
|
3,479
|
|
|
|
3,310
|
|
|
|
6,953
|
|
|
|
6,654
|
|
Other interest expense
|
|
378
|
|
|
|
252
|
|
|
|
599
|
|
|
|
410
|
|
Total interest expense
|
$
|
3,857
|
|
|
$
|
5,555
|
|
|
$
|
7,934
|
|
|
$
|
11,011
|
|
Supplemental Cash Flow Information
“Net cash provided by operating activities” includes cash payments for interest expense and income taxes as follows (in thousands):
|
Six Months Ended
|
|
|
August 31,
|
|
|
2020
|
|
|
2019
|
|
Cash payments for interest and income taxes:
|
|
|
|
|
|
|
|
Interest expense paid
|
$
|
2,780
|
|
|
$
|
3,358
|
|
Income tax paid, net of refunds
|
$
|
447
|
|
|
$
|
466
|
|
NOTE 15 - 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 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 President and Chief Executive Officer, who is our current 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 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.
21
Segment information is as follows (in thousands):
|
Three Months Ended August 31, 2020
|
|
|
Three Months Ended August 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
|
$
|
33,696
|
|
|
$
|
40,732
|
|
|
$
|
9,109
|
|
|
|
|
|
|
$
|
83,537
|
|
|
$
|
31,205
|
|
|
$
|
48,934
|
|
|
$
|
13,097
|
|
|
|
|
|
|
$
|
93,236
|
|
Gross profit
|
$
|
16,502
|
|
|
$
|
10,961
|
|
|
$
|
3,347
|
|
|
|
|
|
|
$
|
30,810
|
|
|
$
|
13,360
|
|
|
$
|
18,184
|
|
|
$
|
6,126
|
|
|
|
|
|
|
$
|
37,670
|
|
Gross margin
|
|
49
|
%
|
|
|
27
|
%
|
|
|
37
|
%
|
|
|
|
|
|
|
37
|
%
|
|
|
43
|
%
|
|
|
37
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
40
|
%
|
Adjusted EBITDA
|
$
|
7,573
|
|
|
$
|
(1,476
|
)
|
|
$
|
227
|
|
|
$
|
(921
|
)
|
|
$
|
5,403
|
|
|
$
|
3,947
|
|
|
$
|
5,341
|
|
|
$
|
2,173
|
|
|
$
|
(814
|
)
|
|
$
|
10,647
|
|
|
Six Months Ended August 31, 2020
|
|
|
Six Months Ended August 31, 2019
|
|
|
Operating Segments
|
|
|
|
|
|
|
|
|
|
|
Operating 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
|
$
|
61,725
|
|
|
$
|
86,271
|
|
|
$
|
15,756
|
|
|
|
|
|
|
$
|
163,752
|
|
|
$
|
56,716
|
|
|
$
|
100,132
|
|
|
$
|
25,458
|
|
|
|
|
|
|
$
|
182,306
|
|
Gross profit
|
$
|
30,317
|
|
|
$
|
26,081
|
|
|
$
|
5,465
|
|
|
|
|
|
|
$
|
61,863
|
|
|
$
|
23,760
|
|
|
$
|
38,228
|
|
|
$
|
11,093
|
|
|
|
|
|
|
$
|
73,081
|
|
Gross margin
|
|
49
|
%
|
|
|
30
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
38
|
%
|
|
|
42
|
%
|
|
|
38
|
%
|
|
|
44
|
%
|
|
|
|
|
|
|
40
|
%
|
Adjusted EBITDA
|
$
|
13,927
|
|
|
$
|
1,647
|
|
|
$
|
(1,346
|
)
|
|
$
|
(2,318
|
)
|
|
$
|
11,910
|
|
|
$
|
6,321
|
|
|
$
|
13,204
|
|
|
$
|
1,303
|
|
|
$
|
(2,612
|
)
|
|
$
|
18,216
|
|
The amount shown for each period in the “Corporate Expenses” column above consists of expenses that are not allocated to the business segments. These non-allocated corporate expenses include salaries and benefits of certain corporate staff and expenses such as audit fees, investor relations, stock listing fees, director and officer liability insurance, and director fees and expenses.
Our CODM evaluates each segment based on earnings before interest, taxes, depreciation, amortization and certain other charges (“Adjusted EBITDA”) and we therefore consider Adjusted EBITDA to be a primary measure of operating performance of our 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
August 31,
|
|
|
Six Months Ended
August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net loss
|
$
|
(9,478
|
)
|
|
$
|
(7,369
|
)
|
|
$
|
(23,900
|
)
|
|
$
|
(16,062
|
)
|
Investment income
|
|
(680
|
)
|
|
|
(1,256
|
)
|
|
|
(698
|
)
|
|
|
(3,337
|
)
|
Interest expense
|
|
3,857
|
|
|
|
5,555
|
|
|
|
7,934
|
|
|
|
11,011
|
|
Income tax provision (benefit)
|
|
266
|
|
|
|
(1,342
|
)
|
|
|
506
|
|
|
|
(3,599
|
)
|
Depreciation
|
|
5,073
|
|
|
|
5,191
|
|
|
|
9,983
|
|
|
|
9,036
|
|
Amortization of intangible assets
|
|
1,844
|
|
|
|
3,318
|
|
|
|
3,736
|
|
|
|
6,358
|
|
Stock-based compensation
|
|
2,846
|
|
|
|
3,183
|
|
|
|
5,594
|
|
|
|
5,726
|
|
Impairment loss
|
|
286
|
|
|
|
—
|
|
|
|
4,575
|
|
|
|
—
|
|
Restructuring charges
|
|
551
|
|
|
|
2,272
|
|
|
|
2,459
|
|
|
|
2,272
|
|
Non-recurring legal expenses
|
|
170
|
|
|
|
777
|
|
|
|
963
|
|
|
|
4,584
|
|
Acquisition and integration related expenses
|
|
—
|
|
|
|
46
|
|
|
|
—
|
|
|
|
1,190
|
|
Other
|
|
668
|
|
|
|
272
|
|
|
|
758
|
|
|
|
1,037
|
|
Adjusted EBITDA
|
$
|
5,403
|
|
|
$
|
10,647
|
|
|
$
|
11,910
|
|
|
$
|
18,216
|
|
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.
22
Revenues by geographic area are as follows (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
August 31,
|
|
|
August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
United States
|
$
|
58,945
|
|
|
$
|
68,684
|
|
|
$
|
110,495
|
|
|
$
|
131,806
|
|
Europe, Middle East and Africa
|
|
15,537
|
|
|
|
13,298
|
|
|
|
31,443
|
|
|
|
26,724
|
|
South America
|
|
5,687
|
|
|
|
5,447
|
|
|
|
11,729
|
|
|
|
10,975
|
|
Asia and Pacific Rim
|
|
1,704
|
|
|
|
1,940
|
|
|
|
4,043
|
|
|
|
4,349
|
|
All other
|
|
1,664
|
|
|
|
3,867
|
|
|
|
6,042
|
|
|
|
8,452
|
|
|
$
|
83,537
|
|
|
$
|
93,236
|
|
|
$
|
163,752
|
|
|
$
|
182,306
|
|
Revenues by geographic area are based upon the country of billing. The geographic location of distributors and OEM customers may be different from the geographic location of the ultimate end users of the products and services provided by us. No single non-U.S. country accounted for more than 10% of our revenue in the three and six months ended August 31, 2020 and 2019.
NOTE 16 – 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.
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.
In connection with this claim, we have accrued our best estimate of the probable liability based on reasonable royalty rates for similar technologies.
Other matters
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.
23