ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS O F FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
CalAmp Corp. (including its subsidiaries unless the context otherwise requires, “CalAmp”, “the Company”, “we”, “our”, or “us”), incorporated in 1981 and re-incorporated in Delaware in 1987, is a connected intelligence company that leverages a data-driven solutions ecosystem to help people and organizations improve operational performance. We solve complex problems for customers within the market verticals of transportation and logistics, commercial and government fleets, industrial equipment, government and consumer vehicles by providing solutions that track, monitor and recover their vital assets. The data and insights enabled by CalAmp solutions provide real-time visibility into a user’s vehicles, assets, drivers, and cargo, giving organizations greater understanding and control of their operations. Ultimately, these insights drive operational visibility, safety, efficiency, maintenance, and sustainability for organizations around the world. Headquartered in Irvine, California, we have an installed base of approximately 10 million devices reporting to our cloud-based platform and approximately 1.6 million software and subscription services subscribers worldwide.
Reportable Segments
We operate under two reportable segments: Software & Subscription Services and Telematics Products.
Software & Subscription Services
Our Software & Subscription Services segment offers solutions comprised of telematics devices bundled with cloud-based application enablement and telematics service platforms that facilitate integration of our own applications, as well as those of third parties, through open APIs to deliver full-featured mobile IoT solutions to a wide range of customers and markets. Our scalable proprietary applications and other subscription services enable rapid and cost-effective development of high-value solutions for customers all around the globe. Services include tracking and monitoring services within Fleet Management as well as Supply Chain Integrity and International Vehicle Location.
Telematics Products
Our Telematics Products segment offers a series of advanced telematics products for the broader connected vehicle and emerging industrial IoT marketplace, which enable customers to optimize their operations by collecting, monitoring and effectively reporting business-critical information and desired intelligence from high-value remote and mobile assets. Our telematics products include asset tracking units, mobile telematics devices, fixed and mobile wireless gateways, and routers. These wireless networking devices underpin a wide range of solutions, and are ideal for applications demanding secure, reliable and business-critical communications. Telematics Products include OEM and MRM products.
Recent Developments
Transition of MRM Telematics Customers to Subscription Arrangements
In the second half of Fiscal 2022, we prompted a strategic shift with customers who historically purchased Mobile Resource Management (“MRM”) telematics devices from us whereby many of these customers were to be transitioned to subscription-based arrangements by way of bundling services with telematics devices under multi-year (generally three years) subscription contracts. Beginning in Fiscal 2022 and through Fiscal 2023, we transitioned a substantial majority of the MRM business to multi-year subscription contracts. As a result, our financial results associated with such subscription arrangements is reported within our Software & Subscription Services reporting segment prospectively from the effective date of such underlying contracts which in Fiscal 2023 led to growth in our Software & Subscription Services business with a corresponding decline in our Telematics Products business. Long term we believe this shift will allow us to drive revenue growth as we generate incremental revenue from our existing customer base as well as new customers through current and anticipated broader future subscription service offerings.
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Sale of LoJack North America Operations
Effective March 15, 2021, we sold certain assets and transferred certain liabilities of the LoJack North America business. Accordingly, the LoJack North America operations are presented as discontinued operations in the accompanying consolidated financial statements for the years ended February 28, 2022, and 2021, respectively.
Unless otherwise indicated, the financial disclosures and related information provided herein relate to our continuing operations and we have recast prior period amounts to reflect discontinued operations.
Results of Operations and Financial Condition
Revenues
Revenues associated with our reportable segments are as follows:
Software & Subscription Services (“S&SS”). Our SaaS-based solutions provide our customers with the ability to wirelessly communicate with monitoring devices installed in vehicles and other mobile or remote assets via our cloud-based telematics platform and software applications. S&SS customer arrangements generally include a bundling of subscription services combined with the sale or lease of telematics devices necessary to provide the associated services. Depending upon the elements of a given contractual arrangement, it may contain one or multiple performance obligations that are individually recognized as revenue over a subscription period or at a point in time based upon how the performance obligation is fulfilled.
Telematics Products. Our products revenues consist primarily of sales of our telematics products or wireless networking devices to large global companies as well as small and medium-sized enterprises. Revenues from our products are reported net of sales returns and allowances, and incentives. The prices charged for telematics products are determined through negotiation with our customers as well as prevailing market conditions and are fixed and determinable upon shipment.
From time to time, we provide various professional services to customers including project management, engineering services, and installation services. Revenues for professional services are typically distinct from other performance obligations and are recognized as the related services are performed.
Cost of Revenues
Our cost of revenues for application subscriptions and other services includes personnel costs and related benefits, consultants, software development activities, cellular network access costs, infrastructure costs for use of private networking services, and other costs that are required to deliver these services to our customers. Our cost of revenues for application subscriptions and other services also includes the cost of devices that are sold on an integrated basis with applicable subscriptions. If the subscription services and associated telematics devices are determined to represent a single combined performance obligation, the device costs are capitalized and are recognized ratably, on a straight-line basis, over the estimated average in-service lives of these devices.
Our cost of revenues for telematics products represent the cost of finished goods sold to our customers and are recognized at the point in time control passes to the customer. These costs include raw materials, manufacturing overhead and labor costs, as well as customs and duties, license royalties, recycling fees, insurance and other costs that are included in the price that we negotiate and pay to our contract manufacturers and component suppliers for the products. The cost of revenues also includes charges related to excess and obsolete inventories and the cost of fulfilling product warranties.
We continually negotiate to reduce the cost we pay to our suppliers in order to maintain consistent low prices for our customers. We accomplish this by working with our suppliers to find alternative, less expensive sources of raw materials and components as well as eliminating excess costs throughout our supply chain.
Gross Profit
Our gross profit and gross profit as a percentage of revenues, or gross margin, is influenced by several factors including sales volume, product and service mix, and excess and obsolescence (“E&O”) charges and other product costs. We expect gross margin to fluctuate over time based on how we control the mix of product and services and manage our inventory. Additionally, although we primarily procure and sell our products in U.S. dollars, we are susceptible to exchange rate fluctuations with other currencies. To the extent that exchange rates move unfavorably
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this may have an impact on our future selling prices and unit costs. Gross profit and gross margin may fluctuate over time based on the factors described above.
Operating Expenses
Our operating expenses consist principally of personnel related costs, including salaries and bonuses, fringe benefits and stock-based compensation as well as the cost of professional services, information technology, facilities and other administrative expenses. We classify our operating expenses into the following six categories:
Research and development expense consists of personnel related costs, professional services, certification fees and software licenses incurred to support our existing installed base of telematics devices through our field application engineers, software developers, program and product managers, as well as our effort to develop new products and technologies.
Selling and marketing expense consists of personnel related costs including our incentive programs to support our global sales organization as well as advertising and marketing promotions of our brands and products, including media advertisement costs, merchandising and display costs, trade show and event costs, and sponsorship costs.
General and administrative expense consists of personnel related costs to support our global enterprise as well as outside services for legal, accounting, insurance, information technology, investor relations and other costs associated with being a public company.
Intangible asset amortization is attributable to our acquired identifiable intangible assets from business combinations. Our acquired intangible assets with definite lives are amortized from the date of acquisition over periods ranging from four to fifteen years.
Restructuring expense consists of personnel and facility related costs resulting from our various cost savings initiatives. Personnel costs represent severance and employee related costs, and facility charges represent expenses for vacant office and manufacturing facility space under Corporate Expenses.
Impairment losses consist of write-offs of long-lived tangible and intangible assets for which carrying value is determined to be in excess of realizable value.
We expect our operating costs will increase in absolute dollars due to the anticipated growth of our business and related infrastructure as well as expansion into new geographic regions. Operating expense may fluctuate as a percentage of revenue throughout the year due to discrete quarterly events and seasonal trends.
Non-Operating Income (Expense)
Non-operating income (expense) consists of (i) investment and interest income earned on our cash balances and investments, (ii) interest expense on our convertible senior unsecured notes including the amortization of note discount and debt issuance costs, and (iii) other income (expense) that includes but is not limited to transaction gains and losses and foreign currency gains and losses.
Income Tax Expense (Benefit)
We are subject to income taxes in the U.S. and related states as well as foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different than the U.S. statutory tax rate. Accordingly, our effective tax rate will vary from the U.S. statutory income tax rate due to the amount of income allocable to each tax jurisdiction, tax credits, and changes in valuation allowances which are provided against net deferred tax assets when it is determined that it is more likely than not that the assets will not be realized.
Income (Loss) from Discontinued Operations, Net of Tax
Effective March 15, 2021, a wholly owned subsidiary of the Company and Spireon entered into an agreement pursuant to which we sold certain assets and transferred certain liabilities of the LoJack North America business to Spireon and we received net proceeds from Spireon of $6.6 million. On November 9, 2021, the purchase price was reduced by $0.9 million, which was paid to Spireon, due to final working capital adjustments. We recognized a gain on the sale of the LoJack North America business of $4.1 million during the fiscal year ended February 28, 2022.
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Operations for LoJack North America are presented as discontinued operations in the accompanying consolidated financial statements for the fiscal years ended February 28, 2022, and 2021, respectively. For the fiscal year ended February 28, 2022, we have reported the operating results and cash flows related to the LoJack North America operations through March 14, 2021. See Note 2, Discontinued Operations , for additional information.
Adjusted EBITDA
In addition to our U.S. GAAP results, we present Adjusted EBITDA as a supplemental non-GAAP measure of our performance. Our CEO, the Chief Operating Decision Maker (“CODM”), uses Adjusted EBITDA to evaluate and monitor segment performance. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that excludes or includes amounts to be different than the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the statements of comprehensive income (loss), balance sheets or statements of cash flows. We define Adjusted EBITDA as earnings before investment income, interest expenses, taxes, depreciation, amortization, net income (loss) from discontinued operations, stock-based compensation, acquisition and integration expenses, non-cash costs and expenses arising from purchase accounting adjustments, litigation and legal expenses, gains and losses from legal settlements, impairment losses and certain other adjustments. We believe this non-GAAP financial information provides additional insight into our ongoing performance and have therefore chosen to provide this information to investors for a more consistent basis of comparison to help investors evaluate our results of ongoing operations and more meaningful period-to-period comparisons. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission regarding the use of non-GAAP financial measures, we have provided a reconciliation of non-GAAP financial measures to the most directly comparable financial measure. See Note 19, Segment and Geographic Data , to the accompanying consolidated financial statements for additional information related to Adjusted EBITDA by reportable segments and reconciliation to net income ().
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OPERATING RESULTS
The following table sets forth the percentage of revenues represented by items included in our consolidated statements of income for the three most recent fiscal years:
Year Ended February 28,
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Intangible asset amortization
Restructuring
Impairment losses
Operating loss
Non-operating expense, net
Loss from continuing operations before income taxes
Income tax provision from continuing operations
Net loss from continuing operations
Net income (loss) from discontinued operations, net of tax
Net loss
Unless otherwise indicated, the discussion on our results of operations provided below relates to our continuing operations and we have recast prior period amounts for purposes of historical comparisons. See Note 2, Discontinued Operations , to the accompanying consolidated financial statements for additional information.
Fiscal year ended February 28, 2023 (“Fiscal 2023”) compared to fiscal year ended February 28, 2022 (“Fiscal 2022”):
Revenue by Segment
Fiscal years ended February 28,
(In thousands)
% of Revenue
% of Revenue
$ Change
% Change
Segment
Software & Subscription Services
Telematics Products
Total
Our Software & Subscription Services enable customers to gather and analyze critical data used to track, monitor and recover vital mobile assets with real-time visibility and insights. Our services focus on three principal end markets: (i) transportation and logistics, (ii) government and municipalities, and (iii) connected car services. As described above, in Fiscal 2022 we began entering into subscription-based arrangements with customers that historically have purchased MRM telematics hardware from us, a shift that favorably impacted revenues in our Software & Subscription Services segment and unfavorably impacted revenues in our Telematics Products segment. In Fiscal 2022, we began experiencing supply shortages driven by the global pandemic. These supply imbalances intensified during Fiscal 2023 and adversely impacted all parts of our business. We expect these supply shortages to continue and to diminish in the coming year as suppliers strive to create additional production capacity.
As of February 28, 2023, our remaining contractual performance obligations for software & subscription services were $234.5 million as compared to $202.0 million as of February 28, 2022. The majority of the growth in contractual performance obligations was driven by the conversion of telematics products customers to multi-year subscription contracts as well as new contracts within the government and municipality markets and connected car markets.
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In Fiscal 2023, Software & Subscription Services revenue increased by $30.4 million or 19.7% compared to Fiscal 2022 largely due to increased transportation and logistics revenues generated through the transition of MRM telematics hardware customers onto multi-year subscription arrangements. Active subscribers increased 50% as of the end of Fiscal 2023 when compared to Fiscal 2022. As mentioned above, supply shortages have impacted our ability to procure the devices we utilize to deliver our subscription services, which has constrained our ability to install our devices and initiate new subscription services.
Telematics Products revenue, comprised primarily of MRM telematics and OEM/network products, decreased by $31.3 million or 22.1% in Fiscal year 2023 compared to Fiscal 2022. This decrease was largely driven by the conversion of certain MRM telematics hardware customers onto multi-year subscription contracts, and thus revenues generated after the contract effective dates for these customers are classified within Software & Subscription Services revenues to the extent they are associated with a subscription arrangement. Telematics Products revenues have also been negatively impacted by the supply shortages described above, thereby limiting our ability to fulfill customer orders.
Gross Profit by Segment
Fiscal years ended February 28,
(In thousands)
% of Revenue
% of Revenue
$ Change
% Change
Segment
Software & Subscription Services
Telematics Products
Gross profit
Consolidated gross profit for Fiscal 2023 decreased by $12.9 million or 10.6% versus Fiscal 2022 and consolidated gross margin decreased by 420 basis points in Fiscal 2023 compared to Fiscal 2022. These decreases were largely due to the continued supply constraints described above, which has in some cases prevented the sourcing of certain scarce essential semiconductors and electronics components at normal market prices. In particular, given aged backlog demand and critical backlog for customers impacted by Verizon’s February 2023 3G network sunset, during the second half of Fiscal 2023 we sourced various components through electronics brokers at elevated prices. We anticipate that we may need to source certain semiconductors and electronics components through brokers in the coming year, but to a lesser extent. Gross margin was also negatively impacted in Fiscal 2023 by an unfavorable shift in customer and product mix. These negative impacts to gross profit and gross margin were partially offset by the increased proportion of overall sales occurring within Software & Subscription Services, which has a higher margin profile, in Fiscal 2023.
Software & Subscription Services: Gross profit increased by $2.5 million or 3.3% in Fiscal 2023 compared to Fiscal 2022, as a result of increased revenues. Gross margin decreased by 690 basis points in Fiscal 2023 compared to Fiscal 2022 primarily driven by the increased cost of sourcing certain scarce essential components through electronics brokers predominantly in the second half of Fiscal 2023 as described above, as well as to a lesser extent, by customer and product mix.
Telematics Products: Gross profit decreased by $15.4 million or 34.3% in Fiscal 2023 compared to Fiscal 2022, primarily due to decreased revenues as well as the cost impact of sourcing certain scarce essential components through electronics brokers predominantly in the second half of Fiscal 2023 as described above. Gross margin decreased 500 basis points in Fiscal 2023 compared to Fiscal 2022 primarily due to the increased cost of sourcing certain components through electronics brokers.
As described above, we are presently experiencing adverse impacts to revenues as a result of global supply shortages of certain components, which are also leading to cost increases on many of these components. As a result, we may continue to experience lower gross margins in the coming quarters if we are unable to effectively mitigate or offset the impacts of these cost increases.
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Operating Expenses
Fiscal years ended February 28,
(In thousands)
% of Revenue
% of Revenue
$ Change
% Change
Research and development
Selling and marketing
General and administrative
Intangible asset amortization
Restructuring
Total
Consolidated research and development expense decreased by $3.9 million or 13.6% in Fiscal 2023 compared to Fiscal 2022 due to a reduction in research and development activities associated with our Telematics Products business, partially offset by increased development efforts focused on expanding our telematics services offering both domestically and internationally. We plan to continue to invest in research and development to supplement and expand our telematics solutions offerings.
Consolidated selling and marketing expense decreased by $1.2 million or 2.4% in Fiscal 2023 compared to Fiscal 2022 and was approximately flat as a percentage of revenues. We expect to continue to make changes in the composition of our salesforce to drive sales of our subscription services.
Consolidated general and administrative expense decreased by $0.5 million or 1.0% in Fiscal 2023 compared to Fiscal 2022 primarily driven by a reduction in outside professional fees in Fiscal 2023, partially offset by recording of $1.9 million of incremental litigation reserves related to the final settlement of the Omega legal matter, which is described in Note 18, Commitments and Contingencies - Legal Proceedings , to the accompanying consolidated financial statements.
Amortization of intangibles decreased slightly in Fiscal 2023 compared to Fiscal 2022.
As described in Note 11, Restructuring Charges , to the accompanying consolidated financial statements, in the fourth quarter of Fiscal 2023, to further progress our strategy of driving growth in our software and subscription services business, we implemented certain cost savings and cost efficiency measures to reduce our expense structure, better align our personnel to a subscription services business model, and terminate non-core initiatives not deemed to be key to our strategic direction. As a result, we incurred restructuring charges of $4.6 million in Fiscal 2023, which was comprised of $1.5 million of severance and employee related costs and the write-off of $3.1 million of amounts previously capitalized in connection with technology initiatives that we determined would no longer provide future benefit. In Fiscal 2022, we incurred $0.6 million of severance and employee related costs in connection with a previous restructuring plan.
Non-operating Income (Expense)
Investment income decreased by $0.2 million to $1.0 million in Fiscal 2023 from $1.2 million in Fiscal 2022. The decrease was primarily driven by lower investment returns on invested funds.
Interest expense decreased $9.1 million to $6.3 million in Fiscal 2023 from $15.3 million in Fiscal 2022 due to the adoption of ASU 2020-06 effective March 1, 2022 under which the conversion feature associated with our convertible notes is no longer separately accounted for as a debt discount and amortized to interest expense. The impacts of the adoption of ASU 2020-06 are more fully described in Note 1, under the caption “ Recently Adopted Accounting Pronouncements ”, to the accompanying consolidated financial statements.
Other non-operating expense was $1.4 million in Fiscal 2023, compared to $2.4 million in Fiscal 2022 , and was largely comprised of costs incurred related to the wind down and transition of the LoJack North America business as well as, to a lesser extent, net foreign currency exchange rate gains and losses.
Income Tax Expense (Benefit)
An income tax expense of $1.2 million was recorded in Fiscal 2023, compared to $1.1 million in Fiscal 2022. Income tax expense in both periods was attributable to foreign operations. The increase in income tax expense in Fiscal 2023 compared to Fiscal 2022 was primarily driven by an increase in pre-tax income attributable to our foreign
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operations in the current period. See Note 13, Income Taxes , to the accompanying consolidated financial statements for additional information.
Net Income (Loss) from Discontinued Operations, Net of Tax
Net income from discontinued operations, net of tax, for Fiscal 2022 was $3.2 million and related to the sale of the LoJack North America business that was completed on March 15, 2021. See Note 2, Discontinued Operations , to the accompanying consolidated financial statements for additional information.
Overall Profitability Measures
Net Loss from Continuing Operations:
Our net loss from continuing operations in Fiscal 2023 was $32.5 million as compared to net loss of $31.1 million in Fiscal 2022. The change in the net loss was largely driven by lower gross margins in the current year, partially offset by reduced operating expenses and reduced interest expense as a result of the implementation of ASU 2020-06 described above.
Adjusted EBITDA:
Fiscal years ended February 28,
(In thousands)
$ Change
% Change
Segment
Software & Subscription Services
Telematics Products
Corporate Expense
Total Adjusted EBITDA
Total Adjusted EBITDA Margin
Adjusted EBITDA for Software & Subscription Services decreased $7.6 million in Fiscal 2023 compared to Fiscal 2022 primarily due to higher operating expenses as a result of investments we are making to develop, market and sell our telematics solutions as well as lower gross margins, partially offset by higher revenues. Adjusted EBITDA for Telematics Products decreased $0.3 million in Fiscal 2023 compared to Fiscal 2022 primarily due to lower revenues and lower gross margins, partially offset by lower operating expenses. Corporate Expenses decreased year-over-year.
See Note 19, Segment and Geographic Data , for a reconciliation of Adjusted EBITDA by reportable segment and a reconciliation to GAAP-basis net loss.
Fiscal 2022 compared to fiscal year ended February 28, 2021 (“Fiscal 2021”)
For a discussion of our results of operations comparison for the Fiscal 2022 and Fiscal 2021, refer to our Annual Report on Form 10-K for Fiscal 2022, filed with the SEC on April 28, 2022.
Liquidity and Capital Resources
In Fiscal 2023, our primary cash needs have been for working capital purposes, and to a lesser extent, capital expenditures. We have historically funded our principal business activities through cash flows generated from operations and cash on hand. As we continue to grow our customer base to a subscription model while increasing our revenues, there will be a need for working capital in the future. While our subscription arrangements create recurring multi-year revenue, they elongate the cash conversion cycle as we must outlay cash for the associated device but recover this cash outlay over a subscription period. Our operations have consumed substantial amounts of cash during Fiscal 2023, and we may continue to incur substantial losses and negative cash flow from operations for the foreseeable future. As of February 28, 2023, we had $41.9 million of cash and cash equivalents, a decrease of $37.3 million from February 28, 2022. While we expect to continue to finance our operations with cash on hand and cash generated from operations, our future performance is subject to economic, operational, financial, competitive and other factors,
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including the current inflationary environment, supply chain constraints and the impact of uncertain international trade relations. See Note 1, Description of Business and Summary of Significant Accounting Policies - Principles of Consolidation , for additional information regarding the Company's liquidity.
Available Borrowing Resources
On July 13, 2022, we replaced our revolving credit facility with JP Morgan Chase Bank, N.A. and we entered into a new credit facility with PNC Bank, N.A., that provides for an asset-based senior secured revolving credit facility for borrowings up to an aggregate of $50.0 million, subject to certain conditions, including borrowing base provisions that limit borrowing capacity to 80% of eligible accounts receivable and 50% of eligible inventory. The revolving credit facility will terminate, and all outstanding loans will become due and payable on the earlier of July 13, 2025 and the date that is ninety days prior to the maturity date of our 2025 Convertible Notes. Borrowings under this credit facility bear interest at either the Bloomberg short-term bank yield rate plus a margin of 2.50% per annum or an alternate base rate plus a margin of 1.50% per annum as selected by us on a periodic basis.
The revolving credit facility contains certain negative and affirmative covenants, including financial covenants that, among other things, require us to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00, measured as of the last day of each fiscal quarter, if our liquidity position (consisting of specified cash balances plus unused availability on the revolving credit facility) falls below $40.0 million on such day. Our ability to comply with the financial covenants in the credit agreement and access our revolving credit facility will be materially affected if our liquidity position falls below $40.0 million. Additionally, our revolving credit facility contains a cash dominion trigger whereby PNC Bank may direct domestic cash balances and receipts to pay down borrowings under the revolving credit facility should our liquidity position, consisting of specified cash balances plus unused availability on the revolving credit facility, fall below $25.0 million at the end of any month. As of February 28, 2023, there were no borrowings outstanding and $2.6 million of outstanding letters of credit under this revolving credit facility, and total remaining borrowing availability was $34.2 million.
In July 2018, we issued the 2025 Convertible Notes in the aggregate amount of $230.0 million, which will come due in August 2025. Our ability to refinance the 2025 Convertible Notes on favorable terms, or at all, will depend on the capital markets and our financial condition. Any downgrade of our credit rating by any of the major credit rating agencies could result in increased borrowing costs and restrictive terms, which could adversely affect our ability to access the debt markets to refinance our existing debt or finance future debt. We also may be unable to issue additional equity without impacting our stock price or being materially dilutive to existing stockholders.
See Note 10, Financing Arrangements , for further information regarding our asset-based credit facility and the 2025 Convertible Notes.
Sale of LoJack North America Operations
On March 14, 2021, we entered into an agreement with Spireon pursuant to which we sold certain assets and transferred certain liabilities of the LoJack North America business for a purchase price of $8.0 million. The transaction was completed effective March 15, 2021 and we received net proceeds of approximately $6.6 million. Subsequently, on November 9, 2021, the purchase price was reduced by $0.9 million, which was paid to Spireon, due to final working capital adjustments. We also entered into a Transition Service Agreement with Spireon on March 15, 2021 (“TSA”) to support Spireon in the transition of LoJack North America customers and to provide recovery services to the existing installed base of LoJack North America customers as an agent of Spireon, which effectively terminated on March 31, 2022. During the service period, we invoiced Spireon for certain costs incurred in operating this business.
We also entered into a post-TSA Services Agreement with Spireon on March 15, 2021 (“SA”), that commenced April 1, 2022 upon the expiration of the TSA, under which we will continue to provide certain services related to the LoJack North America radio frequency tower infrastructure for a period of no longer than fifty-four months, as needed. As consideration for these services, Spireon will pay us a monthly service fee over the stipulated contract term.
PPP Loan
On April 16, 2020, we received proceeds from a loan in the amount of $10 million (the "PPP Loan") from JPMorgan Chase Bank, N.A., as lender, pursuant to the Small Business Association ("SBA") Paycheck Protection Program (the "PPP") of the Coronavirus Aid, Relief, and Economic Security Act. At the time we applied for the PPP Loan, we believed that we qualified to receive the funds pursuant to the PPP. On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the qualification
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requirements for a PPP loan. Out of an abundance of caution and in light of the new guidance, we repaid in full the principal and interest on the PPP Loan on April 27, 2020.
Material Cash Requirements
Following is a summary of our contractual cash obligations as of February 28, 2023 (in thousands):
Future Estimated Cash Payments Due by Period
Contractual Obligations
Less than 1 year
1 - 3 years
3 - 5 years
> 5 years
Total
Convertible senior notes principal
Convertible senior notes stated interest
Operating leases
Purchase obligations
Total contractual obligations
Purchase obligations consist primarily of inventory purchase commitments.
Other
We are a defendant in various legal proceedings involving intellectual property claims and contract disputes. In the patent infringement dispute involving Koninklijke Philips N.V. ("Phillips"), which is discussed in more detail below, the ITC affirmed the Final Initial Determination of the administrative law judge of no violation of Section 337 and terminated the investigation on July 6, 2022 and the deadline for any appeal has passed. The Delaware District Court cases in the Philips matter remain stayed but may be reinstated. In connection with this matter, we may be required to enter into a license agreement or other settlement arrangement that requires us to make a significant payment in the future. While it is not feasible to predict with certainty the outcome of this legal proceeding, based on currently available information, including the ITC’s affirmation of no violation of Section 337, we believe that the ultimate resolution of this matter will not have a material adverse effect on our consolidated results of operations, financial condition and cash flow. See Note 18, Commitments and Contingencies, to the accompanying consolidated financial statements for additional information on legal proceedings.
Cash flows from operating activities
Cash flows from operating activities consist of net loss adjusted for certain non-cash items, including depreciation, intangible asset amortization, stock-based compensation expense, amortization of debt issuance costs, deferred income taxes, amortization of certain revenue assignment arrangements and the effect of changes in components of working capital.
Our cash flows from operating activities are attributable to our net loss as well as management of our working capital, which is dictated by the volume of products we purchase from our manufacturers or suppliers and then sell to our customers along with the payment and collection terms that we negotiate with them. We purchase a majority of our products from significant suppliers located in Asia and Mexico that generally provide us 60-day payment terms for products purchased.
Our significant customers are located in the United States as well as certain foreign countries. We believe that our relationships with our key customers are good and that these customers are in good financial condition. We generally grant credit to our customers based on their financial viability and our historical collections experience with them. We typically require payment from our customers within 30 to 45 days of our invoice date with a few exceptions that extend the credit terms up to 90 days. Historically, since we paid our suppliers at or within 60 days of inventory purchase and our payment terms on our accounts receivable are generally within 45 days, we generated positive cash flows from operating activities. In the second half of Fiscal 2022, we began entering into subscription arrangements with key customers who previously purchased telematics devices from us. While these subscription arrangements create recurring multi-year revenue, they elongate the cash conversion cycle as we must outlay cash for the associated device but recover this cash outlay over a subscription period. Thus the conversion of customers onto subscription arrangements has had an unfavorable impact on cash flows.
For Fiscal 2023, net cash used in operating activities was $22.9 million with a net loss of $32.5 million. Our non-cash income and expenses from continuing operations comprised principally of depreciation, intangible assets
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amortization, stock-based compensation expense, amortization of debt issuance costs and discounts, non-cash operating lease costs and changes in deferred income tax assets totaled $37.2 million. These non-cash expenses were partially offset by non-cash revenues of $2.7 million related to acquired revenue assignment arrangements. Changes in operating assets and liabilities from continuing operations used was $25.0 million of cash, largely as a result of the increase in accounts receivable and contract assets, driven by differences in timing of collections under new subscription arrangements such that less cash is collected at contract inception. We have also experienced growth in lease receivables, which similarly is driven by differences in timing of collections and revenue recognition under subscription arrangements. These cash outflows were partially offset by the timing of payments on accounts payable as we have been able to extend payment terms with some of our key suppliers.
Cash flows from investing activities
In Fiscal 2023 and Fiscal 2022, our net cash used in investing activities was $11.1 million and $7.6 million, respectively. In both of these periods, our investing activities consisted of capital expenditures. We expect that we will make additional capital expenditures in the future, including devices that we lease to customers under subscription agreements, in order to support the future growth of our business.
Net cash provided by investing activities of discontinued operations was $5.7 million in Fiscal 2022, which was comprised of cash proceeds received from the sale of the LoJack North America business.
Cash flows from financing activities
In Fiscal 2023 and Fiscal 2022, our net cash used in financing activities was $0.9 million and $2.6 million, respectively, driven primarily by payments for taxes related to the net share settlement of vested equity awards.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements for Fiscal 2023 describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from the amounts reported based on these policies.
The inputs into certain of our judgments, assumptions, and estimates considered the economic implications of the COVID-19 pandemic on our critical and significant accounting estimates. These estimates are listed in our Consolidated Financial Statements for Fiscal 2023, and include: revenue recognition, patent litigation and loss contingencies, goodwill and long-lived assets and income taxes, among other items. The actual results that we experience may differ materially from our estimates. Many of our estimates could require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve, our estimates may change materially in future periods.
Revenue Recognition
We enter into contracts with customers that can include various combinations of products and services. As a result, our contracts may contain multiple performance obligations. In many customer arrangements subscription services are bundled with the sale or lease of telematics devices within the same contractual arrangement. To determine the performance obligations under these arrangements, we assess the contractual elements and, in particular, whether the telematics products within the arrangement are distinct. This is an area of judgment that includes the consideration of all elements of the arrangement. Significant factors in determining whether telematics devices are distinct are whether such devices are sold separately, as well as the degree of integration and interdependency between the subscription elements of the arrangement and the associated telematics devices. If we conclude that the telematics devices within a customer arrangement are distinct and therefore represent a separate performance obligation, the total expected consideration associated with the contract is allocated between the performance obligations based upon the relative stand-alone selling price associated with each performance obligation. We base stand-alone selling prices on pricing tables for the same or similar items.
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For some customer arrangements, we have concluded that the subscription services and associated telematics devices are not distinct performance obligations and thus represent a single combined performance obligation. In these circumstances, we generally recognize the total expected consideration as revenue over the term of the subscription.
Patent Litigation and Other Contingencies
We are subject to the possibility of various losses arising in the ordinary course of business. We consider the likelihood of impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate information available to us to determine whether such accruals should be made or adjusted and whether new accruals are required.
Third parties, including customers, have in the past and may in the future assert claims or initiate litigation related to exclusive patent, copyright, trademark, and other intellectual property rights to technologies and related standards that are relevant to us. These assertions may increase over time as a result of our growth and the general increase in the pace of patent claims assertions, particularly in the United States. If any infringement or other intellectual property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.
We accrue for these intellectual property claims whenever we determine that an unfavorable outcome is probable and the liability is reasonably estimable. The amount of the accrual is estimated based on our review of each individual claim, including the type and facts of the claim and our assessment of the merits of the claim. Since these legal matters can be very complex and require significant judgment, we often utilize external legal counsel and other subject matter experts to assist us in defending against such claims. 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. Although we believe that we take reasonable and considerable measures to mitigate our exposure in these matters, the outcome of litigation is inherently unpredictable. Nonetheless, 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.
One recently resolved patent infringement lawsuit filed against us by Omega Patents, LLC (“Omega”) and one partially resolved patent infringement lawsuit filed against us by Philips are discussed in more detail below.
Omega
The parties commenced a mediation on April 12, 2022, and on May 17, 2022, CalAmp and Omega executed an agreement for a settlement and release and a covenant not to sue under certain patents. On June 1, 2022, we paid $4.9 million pursuant to this settlement agreement. The parties filed a Joint Stipulation of Dismissal With Prejudice on June 15, 2022, and on June 16, 2022, the court dismissed the case with prejudice.
Philips
On April 1, 2022, the administrative law judge (“ALJ”) at the International Trade Commission (“ITC”) issued a Final Initial Determination on the question of the violation of section 337 (19 U.S.C. § 1337). The ALJ determined that a violation of section 337 has not occurred with respect to any of the asserted patents. On July 6, 2022, the ITC affirmed the Final Initial Determination of no violation of Section 337 and terminated the investigation and the deadline for any appeal has passed. While one of the district court cases filed by Philips in Delaware has been recently reopened for a status conference, the other two district court cases filed by Philips remain stayed. We believe that we have strong non-infringement and invalidity defenses in the Delaware district court cases. Also, we believe we have strong indemnification claims against our communication module suppliers, and are entitled to have our defense costs and any resulting from these proceedings paid by those suppliers, who are co- in these proceedings. Currently, it is not feasible to predict with certainty the outcome of these three legal proceedings, and no specific amount of has been identified.
See Note 18, Commitments and Contingencies , to the accompanying consolidated financial statements for additional information.
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Goodwill and 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. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The estimates of fair value of the reporting units are computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of the reporting units. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including future gross margin rates, expense rates, capital expenditures and other estimates), and a rate used to discount estimated future cash flow projections to their present value (or estimated fair value) based on estimated weighted average cost of capital (i.e., the selected discount rate). We select assumptions used in the financial forecasts by using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses (i.e. guideline companies). The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services.
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.
The recoverability assessment with respect to each of the tradenames used in our operations requires us to estimate the fair value of the asset as of the assessment date. Such determination is made using discounted cash flow techniques (Level 3 determination of fair value). Significant inputs to the valuation model include future revenue and profitability projections associated with the tradename through a relief from royalty approach; estimated market royalty rates that could be derived from the licensing of our tradenames to third parties in order to establish the cash flows accruing to the benefit of the Company as a result of our ownership of our tradenames; and rates used to discount the estimated royalty cash flow projections to their present value (or estimated fair value).
As further described above, we have transitioned a substantial majority of customers who have historically purchased MRM telematics products from us onto long-term subscription contracts, which has resulted in growth in Software & Subscription Services revenues and a corresponding decline in Telematics Products revenues. As a result of this customer transition between reporting units, in the fourth quarter of Fiscal 2023, a portion of the goodwill previously associated with our Telematics Products reporting unit was re-allocated amongst the reporting units impacted by this customer transition.
At February 28, 2023, we had $94.2 million in goodwill and $26.6 million in other net intangible assets, recorded on our consolidated balance sheet. Additionally, we had three reporting units, one reporting unit under our Telematics Products segment and two reporting units under our Software and Subscription Services segment. Our Telematics Products segment includes $16.2 million of goodwill and our Software & Subscription Service segment includes $78.0 million.
See Note 7, Property and Equipment , and Note 8, Goodwill and Other Intangible Assets , to the accompanying consolidated financial statements for additional information.
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Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective tax rates differ from the statutory rate, primarily due to the tax impact of state taxes, foreign operations, R&D tax credits, global intangible low-taxed income, nondeductible officer compensation, and transfer pricing adjustments. Our tax provision for income taxes is inherently difficult to estimate and record. This is due to the complex nature of the U.S. and International tax codes; earnings being different than anticipated in countries with different tax rates; changes in the valuation of our deferred tax assets and liabilities; changes in tax laws and regulations, treaties, or interpretations thereof, including changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses attributable to foreign income, and the foreign tax credit rules.
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We believe our reserves are reasonable and that our historical income tax provisions and accruals for these uncertain positions are sufficient. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties.
Significant judgment is also required in determining any valuation allowance recorded against our net deferred tax assets in a particular jurisdiction. Currently we maintain a valuation allowance in the U.S. and certain foreign jurisdictions. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
At February 28, 2023, our federal income tax loss carryforwards were approximately $80.6 million, our state income tax loss carryforwards were approximately $87.8 million, and our foreign income tax loss carryforwards were approximately $61.3 million. Since these losses have varying degrees of carryforward periods, it requires us to estimate the amount of carryforward losses that we can reasonably expect to realize. Future changes in anticipated earnings could change the amount of carry forward losses that we expect to realize and the amount of valuation allowances we have recorded (see Note 13, Income Taxes , for additional information).
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Forward Looking Statements
Forward looking statements in this Form 10-K which include, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions, projections and other information regarding future performance, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “may”, “will”, “could”, “plans”, “intends”, “seeks”, “believes”, “anticipates”, “expects”, “estimates”, “judgment”, “goal”, and variations of these words and similar expressions, are intended to identify forward-looking statements. These forward-looking statements reflect our current views with respect to future events and financial performance and are subject to certain risks and uncertainties that are difficult to predict, including, without limitation, the impact of adverse and uncertain economic conditions in the U.S. and international markets, the sufficiency of our cash and cash equivalents to meet our liquidity needs and service our indebtedness, product demand, competitive pressures and pricing declines in our markets, the timing of customer approvals of new product designs, intellectual property infringement claims, interruption or of our Internet-based systems used to wirelessly configure and communicate with the tracking and monitoring devices that we sell, global component supply due to ongoing supply chain constraints, the phased implementation of our ERP system, the effect of tariffs on exports from China and other countries, the ongoing effects of the COVID-19 pandemic (including its effect on the supply of labor), and other risks and uncertainties that are set forth in Part I, Item 1A of this Annual Report on Form 10-K (Risk Factors). Such risks and uncertainties could cause actual results to differ materially and from historical or anticipated results. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be . We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Given these risks and uncertainties, readers are not to place reliance on such forward-looking statements.
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ITEM 7A. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
We have international operations, giving rise to exposure to market risks from changes in currency exchange rates. A cumulative foreign currency translation loss of $1.9 million related to our foreign subsidiaries is included in accumulated other comprehensive loss in the stockholders' equity section of the consolidated balance sheet at February 28, 2023. The aggregate foreign currency transaction exchange rate losses included in determining loss before income taxes were $0.1 million, $0.2 million and $0.2 million in fiscal years ended February 28, 2023, 2022 and 2021, respectively.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our marketable securities investment portfolio. The primary objective of our investment activities is to preserve principal and liquidity while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our investments portfolio in a variety of available-for-sale fixed debt securities, including both government and corporate obligations and money market funds. Investments in fixed rate interest bearing instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in prevailing interest rates. Due in part to these factors, we may suffer losses in principal if we need the funds prior to maturity and choose to sell securities that have declined in market value due to changes in interest rates or perceived credit risk related to the securities’ issuers.
As the majority of our investment portfolio has a short-term nature, we do not believe an immediate increase or decrease in interest rate would have a material effect on the fair market value of our portfolio, and therefore, we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.
We do not believe our cash equivalents have significant risk of default or illiquidity. However, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on these deposits.
Loans outstanding under our revolving credit facility bear interest at either the Bloomberg short-term bank yield rate plus a margin of 2.50% per annum or an alternate base rate plus a margin of 1.50% per annum. Changes in interest rates would impact our variable rate borrowings. There were no borrowings outstanding under this revolving credit facility at February 28, 2023.
ITEM 8. FINANCIAL STATEMEN TS AND SUPPLEMENTARY DATA
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REPORT OF INDEPENDENT REGIS TERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of CalAmp Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CalAmp Corp. and subsidiaries (the "Company") as of February 28, 2023 and 2022, the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows, for each of the three years in the period ended February 28, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended February 28, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 28, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 27, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for convertible debt effective March 1, 2022, due to the adoption of Accounting Standards Update, 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill – Telematics Products Reporting Unit – Refer to Notes 1 and 8 to the Financial Statements
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Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the discounted cash flow model and the market approach. The determination of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future gross margin rates. Changes in this assumption could have a significant impact on the fair value of the reporting unit and the amount of any goodwill impairment charge. As a result of the customer transition between reporting units, in the fourth quarter of Fiscal 2023, a portion of the goodwill previously associated with the Telematics Products reporting unit was re-allocated amongst the reporting units impacted by this customer transition. The goodwill balance was $94.2 million as of February 28, 2023 of which $16.2 million was allocated to the Telematics Products Reporting Unit. The fair value of Telematics Products reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized.
We identified goodwill for Telematics Products as a critical audit matter because of the significant judgments made by management to estimate the fair value of Telematics Products reporting unit. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future gross margin rates and mostly notably, considerations related to the transition of customers from the Telematics Products reporting unit to a reporting unit under the Company’s Software & Subscription Services operating segment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of future gross margin rates used by management to estimate the fair value of Telematics Products reporting unit included the following, among others:
We tested the effectiveness of controls over management’s goodwill impairment evaluation and reallocation of goodwill, including those over the determination of the fair value of Telematics Products reporting unit, such as controls related to management’s forecasts of future gross margin rates.
We evaluated management’s ability to accurately forecast future gross margin rates by comparing projected gross margin rates to management’s historical gross margin rates. This included management’s evaluation of the customer transition from the Telematics Products reporting unit to a reporting unit under the Company’s Software & Subscription Services operating segment and how that would, in turn, impact future gross margins rates.
We evaluated the reasonableness of management’s forecasted gross margin rates by comparing the forecasts to:
Historical gross margin rates.
Gross margin rates utilized in management’s long-range strategic plan which was communicated to the Board of Directors
Revenue Recognition — Refer to Note 1 to the financial statements
Critical Audit Matter Description
In many customer arrangements within the Company’s Software & Subscription Services segment, the subscription services are bundled with the sale or lease of telematics devices within the same contractual arrangement. To determine the performance obligations under these arrangements, the Company assesses the contractual elements and, in particular, whether the telematics products within the arrangement are distinct. This is an area of judgment that includes the consideration of all elements of the arrangement. Significant factors in determining whether telematics devices are distinct are whether such devices are sold separately, as well as the degree of integration and interdependency between the subscription elements of the arrangement and the associated telematics devices. If the Company concludes that the telematics devices within a customer arrangement are distinct, and therefore represent a separate performance obligation, the total expected consideration associated with the contract is allocated between the performance obligations based upon the relative stand-alone selling price associated with each performance obligation.
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For some customer arrangements, the Company has concluded that the subscription services and associated telematics devices are not distinct promises and thus represent a single combined performance obligation. In these circumstances, the Company generally recognizes the total expected consideration as revenue over the term of the subscription.
Significant judgment is required to determine whether the performance obligations in these contracts are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract. This judgment can have a significant impact on the timing of revenue recognition. Auditing these aspects include especially challenging auditor judgment due to the nature and extent of audit effort required to address this matter.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s evaluation of contracts with multiple promises included the following, among others:
– We tested the effectiveness of controls related to management’s identification and assessment of performance obligations in contracts with customers.
– We performed an analysis of how each step within the accounting guidance was addressed for each revenue transaction selected in our substantive test of details.
– We tested management’s identification of performance obligations by evaluating whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the underlying goods and services were highly interdependent and interrelated.
– We obtained and tested individual customer contracts to evaluate the appropriateness of management’s identification of performance obligations.
– We verified that the timing of revenue recognition was appropriate based on the performance obligation identified by inspecting evidence supporting the transfer of control of telematics devices or services to the customer.
/s/ Deloitte & Touche LLP
Costa Mesa, CA
April 27, 2023
We have served as the Company’s auditor since Fiscal 2018.
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CALAMP CORP.
CONSOLIDATED B ALANCE SHEETS
(In thousands, except par value)
February 28,
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Deferred income tax assets
Goodwill
Other intangible assets, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued payroll and employee benefits
Deferred revenue
Other current liabilities
Total current liabilities
Long-term debt, net of current portion
Operating lease liabilities
Other non-current liabilities
Total liabilities
Commitments and contingencies (see Note 18)
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;
37,388 and 36,052 shares issued and outstanding
at February 28, 2023 and 2022, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
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CALAMP CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except per share amounts)
Year Ended February 28,
Revenues:
Products
Application subscriptions and other services
Total revenues
Cost of revenues:
Products
Application subscriptions and other services
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Intangible asset amortization
Restructuring
Impairment losses
Total operating expenses
Operating loss
Non-operating income (expense):
Investment income
Interest expense
Other expense, net
Total non-operating expenses
Loss from continuing operations before income taxes
Income tax provision from continuing operations
Net loss from continuing operations
Net income (loss) from discontinued operations, net of tax
Net loss
Loss per share - continuing operations:
Basic
Diluted
Earnings (Loss) per share - discontinued operations:
Basic
Diluted
Shares used in computing earnings (loss) per share:
Basic
Diluted
Comprehensive loss:
Net loss
Other comprehensive (loss) income:
Foreign currency translation adjustments
Total comprehensive loss
See accompanying notes to consolidated financial statements.
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CALAMP CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Year Ended February 28,
Total stockholders' equity, beginning balances
Common stock and additional paid-in capital:
Beginning balances
Cumulative-effect adjustment related to the adoption of ASU 2020-06
Stock-based compensation expense
Shares issued on net share settlement of equity awards
Exercise of stock options and contributions to ESPP
Ending balances
Accumulated deficit:
Beginning balances
Cumulative-effect adjustment related to the adoption of ASU 2020-06
Net loss
Ending balances
Accumulated other comprehensive income (loss):
Beginning balances
Foreign currency translation adjustments
Ending balances
Total stockholders' equity, ending balances
See accompanying notes to consolidated financial statements.
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CALAMP CORP.
CONSOLIDATED STATEM ENTS OF CASH FLOWS
(In thousands)
Year Ended February 28,
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Less: net income (loss) from discontinued operations, net of tax
Net loss from continuing operations
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities:
Depreciation expense
Intangible asset amortization
Stock-based compensation
Amortization of debt issuance costs and discount
Impairment losses
Non-cash operating lease cost
Revenue assigned to factors
Deferred tax assets, net
Changes in operating assets and liabilities of continuing operations, excluding effects from acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued liabilities
Deferred revenue
Operating lease liabilities
Other
Net cash (used in) provided by operating activities - continuing operations
Net cash used in operating activities - discontinued operations
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and sale of marketable securities
Purchases of marketable securities
Capital expenditures
Net cash used in investing activities - continuing operations
Net cash provided by (used in) investing activities - discontinued operations
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Paycheck Protection Program Loan
Repayment of Paycheck Protection Program Loan
Proceeds from revolving credit facility, net of issuance costs
Repayment of 2020 Convertible Notes
Repayment of revolving credit facility
Taxes paid related to net share settlement of vested equity awards
Proceeds from exercise of stock options and contributions to employee stock purchase plan
NET CASH USED IN FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See accompanying notes to consolidated financial statements.
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CALAMP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
CalAmp Corp. (including its subsidiaries unless the context otherwise requires, “CalAmp”, “the Company”, “we”, “our”, or “us”) is a connected intelligence company that leverages a data-driven solutions ecosystem to help people and organizations improve operational performance. We solve complex problems for customers within the market verticals of transportation and logistics, commercial and government fleets, industrial equipment, and consumer vehicles by providing solutions that track, monitor, and recover their vital assets. The data and insights enabled by CalAmp solutions provide real-time visibility into a user’s vehicles, assets, drivers, and cargo, giving organizations greater understanding and control of their operations. Ultimately, these insights drive operational visibility, safety, efficiency, maintenance, and sustainability for organizations around the world. We are a global organization that is headquartered in Irvine, California.
Recent Events
Transition of MRM Telematics Customers to Subscription Arrangements
In the latter half of Fiscal 2022, we prompted a strategic shift with customers who historically purchased MRM telematics devices from us whereby many of these customers were to be transitioned to subscription-based arrangements by way of bundling services with telematics devices under multi-year (generally three years) subscription contracts. Beginning in Fiscal 2022 and through Fiscal 2023, we transitioned a substantial majority of the MRM business to multi-year subscription contracts. As a result, our financial results associated with such subscription arrangements is reported within our Software & Subscription Services reporting segment prospectively from the effective date of such underlying contracts which in Fiscal 2023 led to growth in our Software & Subscription Services business with a corresponding decline in our Telematics Products business. Long term we believe this shift will allow us to drive revenue growth as we generate incremental revenue from our existing customer base as well as new customers through current and anticipated broader future subscription service offerings.
Basis of Presentation
Our consolidated financial statements include the accounts of CalAmp Corp. (a Delaware corporation) and all of our wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
Our consolidated financial statements have been prepared with the assumption that the Company will continue as a going concern. Based on our current and projected level of operations, we believe that our future cash flows from operating activities, our existing cash and cash equivalents and our credit facility will provide adequate funds for ongoing operations and working capital requirements for at least the next 12 months. However, our business is subject to various factors that could impact operations, and such impacts could be material.
As further discussed in Note 2, Discontinued Operations , the operating results and cash flows related to the LoJack North America business are presented as discontinued operations.
Certain prior period disclosures have been modified to conform to the current period presentation.
Reportable Segments
As further discussed in Note 19, Segment and Geographic Data, our two reportable segments are Software & Subscription Services and Telematics Products.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates and assumptions. Significant items subject to such estimates and assumptions include allowances for doubtful accounts; charges for excess and obsolete inventory; deferred income tax asset valuation allowances; goodwill and other
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long-lived assets; stock-based compensation; legal contingencies and revenue recognition. The current COVID-19 pandemic and general economic environment, and our supplier and customer concentrations also increase the degree of uncertainty inherent in these estimates and assumptions.
Revenue Recognition
We enter into contracts with our customers to provide telematics solutions through various combinations of platform and application subscriptions and associated telematics devices. We recognize revenue when distinct promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. In determining revenue recognition we apply the following five-step approach:
identify the contract with a customer;
identify the performance obligations in the contract;
determine the transaction price;
allocate the transaction price to the performance obligations in the contract; and
recognize revenue when (or as) we satisfy a performance obligation.
We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for goods or services we transfer to the customer.
Revenues from subscription services are recognized ratably on a straight-line basis over the term of the subscription, which generally ranges from two to five years .
We recognize revenue from telematics product sales upon the transfer of control of promised products to customers in an amount that reflects the transaction price. 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.
From time to time, we provide various professional services to customers. These services include project management, engineering services and installation services, which are often distinct from other performance obligations and are 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.
In many customer arrangements subscription services are bundled with the sale or lease of telematics devices within the same contractual arrangement. To determine the performance obligations under these arrangements, we assess the contractual elements and, in particular, whether the telematics products within the arrangement are distinct. This is an area of judgment that includes the consideration of all elements of the arrangement. Significant factors in determining whether telematics devices are distinct are whether such devices are sold separately, as well as the degree of integration and interdependency between the subscription elements of the arrangement and the associated telematics devices. If we conclude that the telematics devices within a customer arrangement are distinct and therefore represent a separate performance obligation, the total expected consideration associated with the contract is allocated between the performance obligations based upon the relative stand-alone selling price associated with each performance obligation. We base stand-alone selling prices on pricing tables for the same or similar items.
For some customer arrangements, we have concluded that the subscription services and associated telematics devices are not distinct performance obligations and thus represent a single combined performance obligation. For certain other customer arrangements under which devices are leased in combination with subscription services, we consider the arrangement to be predominately a subscription service and thus a combined single performance obligation for purposes of revenue recognition. In both of these circumstances, we generally recognize the total expected consideration as revenue over the term of the subscription. In customer arrangements for which the embedded lease is an operating lease, we utilize the practical expedient that allows for the combining of lease and nonlease components. Device related costs associated with arrangements in which title to the device is transferred to the customer under a single combined performance obligation are recorded as deferred costs on the balance sheet and are amortized into cost of revenues over the term of the subscription or the estimated in-service lives of the devices. In contractual arrangements under which we provide devices as part of the subscription contract but we retain control of the devices, the cost of the devices is capitalized as property and equipment and depreciated over the estimated useful life of three to five years .
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We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer.
The timing of revenue recognition may differ from the timing on our invoicing to customers. Contract assets are comprised of unbilled amounts for which we have transferred products or provided services to our customers and are classified as accounts receivable. As of February 28, 2023 and February 28, 2022, contract assets aggregated for $ 28.3 million and $ 11.1 million , respectively. Contract liabilities (deferred revenues) are comprised of payments received from our customers in advance of performance under the contract. During the fiscal year ended February 28, 2023, we recognized $ 26.4 million in revenue from the deferred revenue balance of $ 32.1 million as of February 28, 2022.
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. Sales commissions included in prepaid expenses and other current assets and other assets were $ 1.7 million and $ 4.1 million , respectively, as of February 28, 2023.
We disaggregate revenue from contracts with customers into reportable segments, geography, type of goods and services and timing of revenue recognition. See Note 19, Segment and Geographic Data , for our revenue by segment and geography. The disaggregation of revenue by type of goods and services and by timing of revenue recognition is as follows (in thousands):
Year Ended February 28,
Revenue by type of goods and services:
Telematics devices and accessories
Rental income and other services
Recurring application subscriptions
Total
Revenue by timing of revenue recognition:
Revenue recognized at a point in time
Revenue recognized over time
Total
Telematics devices and accessories revenues presented in the table above include devices sold in customer arrangements that include both device and subscription services. Revenues related to recurring application subscriptions include subscription revenues as well as amortization of deferred revenue for contractual arrangements under which the subscription services and associated telematics devices were determined to be a single combined performance obligation.
Remaining performance obligations for Software & Subscription Services represents contracted revenue that has not yet been recognized, which includes deferred revenue on our consolidated balance sheets and unbilled amounts that will be recognized as revenue in future periods. As of February 28, 2023 and February 28, 2022, we have estimated remaining performance obligations for contractually committed revenues of $ 234.5 million and $ 202.0 million respectively. As of February 28, 2023, we expect to recognize approximately 49 % of the revenue under these remaining performance obligations in F is cal 2024 and 27 % in F is cal 2025 . As of February 28, 2022, we expected to recognize approximately 47 % of the then remaining performance obligations in F is cal 2023 and 24 % in F is cal 2024 . We exclude contracts that have original durations of less than one year from the aforementioned remaining performance obligation disclosure.
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.
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Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, marketable debt securities and trade accounts receivable.
Cash and cash equivalents as well as investments are maintained with several financial institutions. Deposits held with banks may exceed the federally insured limits. These deposits are maintained with reputable financial institutions and are redeemable upon demand. We have not experienced any losses in such accounts.
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 or in some cases amounts expected to be invoiced. Our payment terms generally range between 30 to 60 days of our invoice date with a few exceptions that extend the credit terms up to 90 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. 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 annual report. 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. Since our historical loss rates have not shown any significant differences between customer industries or geographies, we have grouped all accounts receivables and lease receivables into a single portfolio. As described in Note 19, Segment 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.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out method) or market (net realizable value). Inventories are reviewed for excess quantities and obsolescence based upon usage levels and demand forecasts for a specific time horizon. We record a charge to cost of revenues for the amount required to reduce the carrying value of inventory to estimated net realizable value. Ongoing changes in cellular carrier technology, supplier changes, changes in demand or significant reductions in product pricing may necessitate additional write-downs of inventory carrying value in the future, which could be material.
Property and equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the respective estimated useful lives of the assets ranging from two to seven years . Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful life of the assets. Maintenance and repairs are expensed as incurred.
We capitalize certain costs incurred in connection with developing or obtaining internal-use software and software embedded in our products. These costs are recorded as property and equipment in our consolidated balance sheets and are amortized over useful lives ranging from three to seven years . The devices leased to our customers under operating leases are capitalized as property and equipment and being depreciated over the life of the devices.
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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 made by management. 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.
Goodwill and 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. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The estimates of fair value of the reporting units are computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of the reporting units. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including future gross margin rates, expense rates, capital expenditures and other estimates), and a rate used to discount estimated future cash flow projections to their present value (or estimated fair value) based on estimated weighted average cost of capital (i.e., the selected discount rate). We select assumptions used in the financial forecasts by using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses (i.e. guideline companies). The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services.
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.
The recoverability assessment with respect to each of the tradenames used in our operations requires us to estimate the fair value of the asset as of the assessment date. Such determination is made using discounted cash flow techniques (Level 3 determination of fair value). Significant inputs to the valuation model include future revenue and profitability projections associated with the tradename through a relief from royalty approach; estimated market royalty rates that could be derived from the licensing of our tradenames to third parties in order to establish the cash flows accruing to the benefit of the Company as a result of our ownership of our tradenames; and rates used to discount the estimated royalty cash flow projections to their present value (or estimated fair value).
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In the fourth quarter of Fiscal 2020 and throughout Fiscal 2021, we determined that the prolonged secular decline in revenues from our legacy LoJack U.S. stolen vehicle recovery (“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 continuing unfavorable impact that the COVID-19 pandemic has had on the automotive end markets over the past year. As a result, we initiated an assessment of the carrying amount of the related goodwill, intangible and long-lived assets supporting these products including the LoJack tradename and dealer and customer relationships in both fiscal years. Based upon our assessment of economic conditions, our expectations of future business conditions and trends, our projected revenues, earnings, and cash flows, we determined that goodwill and certain of our long-lived assets were impaired in fiscal year 2021 as follows (in thousands):
Year Ended February 28,
LoJack U.S. SVR Products goodwill
Other intangible assets:
Developed technology
Tradenames
Dealer and customer relationships
Property and equipment and other assets
Operating lease right-of-use assets and related liabilities
Total
Of the above amounts, $ 23.8 million was included in discontinued operations in the year ended February 28, 2021 (see Note 2, Discontinued Operations , for additional information).
Fair Value Measurements
Our cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these items. Our marketable securities are measured at fair value on a recurring basis.
The framework for measuring fair value and related disclosure requirements about fair value measurements are provided in ASC 820, Fair Value Measurements (ASC 820). This pronouncement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy proscribed by ASC 820 contains three levels as follows:
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 or 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 a single debt instrument measured at amortized cost, net of unamortized debt issuance costs. Debt issuance costs are amortized to interest expense over the term of the notes using the effective interest rate method. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amount is immediately expensed. We account for the cost of the capped calls as a reduction to additional paid-in capital.
Research and Development Costs
Research and development costs are expensed as incurred. In certain cases, costs are incurred to purchase materials and equipment for future use in research and development efforts. In such cases, these costs are capitalized and expensed as consumed.
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Product Warranty
All products have a one - to three-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 estimates for actual warranty claims, historical claims experience as well as the impact of known product quality issues.
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 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.
Income Taxes
We use the asset and liability method when accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for future tax consequences attributable to the difference 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 recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We recognize interest and/or penalties related to uncertain tax positions in income tax expense. Valuation allowances are provided against net deferred tax assets when it is determined that it is more likely than not that the assets will not be realized. In assessing valuation allowances, we review historical and future expected operating results and other factors, including cumulative earnings experience, expectations of future taxable income by jurisdiction and the carryforward periods available for reporting purposes.
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 loss during the period. The aggregate foreign currency transaction exchange rate losses included in determining loss from continuing operations before income taxes were $ 0.1 million , $ 0.2 million and $ 0.2 million in fiscal years 2023, 2022 and 2021 , respectively.
Stock-Based Compensation
Our stock-based compensation expense resulting from grants of employee stock options, restricted stock and restricted stock units is recognized in the consolidated financial statements based on the respective grant date fair values of the awards. We use the Black-Scholes option-pricing method for valuing stock options and shares granted under the employee stock purchase plan and recognize the expense over a requisite service (vesting) period using the straight-line method. Restricted stock units (RSUs), are valued based on the fair value of our common stock on the date of grant. The measurement of stock-based compensation is based on several criteria such as the type of equity award, the valuation model used and associated input factors including the expected term of the award, stock price volatility, risk free interest rate and forfeiture rate. Certain of these inputs are subjective and are determined based in part on management's judgment. We account for forfeitures as they occur, rather than estimating expected forfeitures over the course of a vesting period.
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Other Comprehensive Income (Loss)
Other comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss) (“OCI”). OCI refers to revenue, expenses and gains and losses that under U.S. GAAP are recorded as an element of stockholders’ equity and excluded from net income (loss). Our OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.
Recently Issued Accounting Standards Not Yet Adopted
The Company has reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a material impact on the Company’s consolidated financial statements.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 814-40), which removes certain separation models for convertible debt instruments and convertible preferred stock that require the separation of a convertible debt instrument into a debt component and an equity or derivative component. Specifically, the new pronouncement removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. We adopted ASU 2020-06 effective March 1, 2022, the beginning of Fiscal 2023, utilizing the modified retrospective approach whereby the cumulative effect of the change in accounting was recognized as an adjustment to the opening balance of retained earnings (accumulated deficit) at the date of adoption. Comparative information has not been restated and continues to be presented in accordance with accounting standards that were in effect for those periods.
Prior to the adoption of ASU 2020-06, we allocated the gross proceeds of the Convertible Notes between the liability and equity components under the cash conversion feature model using the accounting rules in GAAP (ASC 470-20). The carrying amount of the liability component was calculated 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 was calculated by deducting the carrying value of the liability component from the principal amount of the notes as a whole. This difference represented a debt discount and was being amortized to interest expense over the term of the notes using the effective interest rate method. The equity component of the notes was included in stockholders' equity and was not remeasured as long as it continued to meet the conditions for equity classification.
Effective March 1, 2022, we no longer separately present in equity an embedded conversion feature of such debt. Instead, we account for a convertible debt instrument wholly as debt unless (i) the convertible debt instrument contains features that require bifurcation as a derivative or (ii) the convertible debt instrument was issued at a substantial premium. Prior to the adoption of ASU 2020-06, debt issuance costs attributable to the liability component were amortized to interest expense using the effective interest method and debt issuance costs attributable to the equity component were netted with the equity component in stockholders' equity. Upon adoption, the entire amount of debt issuance costs is reflected as a contra-liability and amortized as interest expense using the effective interest method over the respective term of the notes. We account for the cost of the capped calls as a reduction to additional paid-in-capital.
After adopting the new guidance, the use of the if-converted method is required when calculating diluted earnings per share ("EPS") for convertible instruments and the treasury stock method should no longer be used. Under the new guidance, convertible instruments that may be settled in cash or shares are to be included in the calculation of diluted EPS if the effect is more dilutive, with no option for rebutting the presumption of share settlement based on stated policy or past experience. If we make an irrevocable election to settle the principal of the Convertible Notes in cash and the excess conversion spread in shares, the if-converted method will result in a reduced number of shares issued to reflect only the excess conversion.
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The below adoption adjustments were calculated based on the carrying amount of the Convertible Notes as if it had always been treated as a liability only. Furthermore, these adjustments address the debt issuance costs contra-liability and equity (additional paid-in capital) components under the same premise (i.e., as if the total amount of debt issuance costs had always been treated as a contra-liability only). Lastly, we derecognized the deferred income taxes associated with the debt discount and adjusted deferred income taxes relative to unamortized debt issuance costs associated with the Convertible Notes. This resulted in a net increase in gross deferred taxes of $ 9.4 million but no impact to the net deferred tax asset balance due to the valuation allowance recorded against our domestic deferred tax assets. We expect lower interest expense related to the Convertible Notes to be recognized in future periods subsequent to the adoption as a result of accounting for the Convertible Notes as a single liability measured at amortized cost.
The following table summarizes the impact of the adoption of ASU 2020-06 on our consolidated balance sheet on March 1, 2022 (in thousands).
February 28, 2022
ASU 2020-06
March 1, 2022
As Reported
Adoption Impact
As Adjusted
Deferred income tax assets, net
Total debt (1)
Additional paid-in-capital
Accumulated deficit
(1) Prior to adoption, the carrying value of the convertible debt represented the principal amount less the unamortized debt discount and unamortized debt issuance costs. After adoption, the carrying value of convertible debt represents the principal amount less the unamortized debt issuance costs.
NOTE 2 – DISCONTINUED OPERATIONS
Effective March 15, 2021, a wholly owned subsidiary of the Company and Spireon entered into an agreement (“Sale Agreement”) pursuant to which we sold certain assets and transferred certain liabilities of the LoJack North America business (“LoJack Transaction”) for an upfront cash purchase price of approximately $ 8.0 million. We received net proceeds of $ 6.6 million, based on an estimate of certain adjustments to the gross purchase price as of the closing date. On November 9, 2021, the purchase price was reduced by $ 0.9 million, which was paid to Spireon, due to final working capital adjustments. No further adjustments to the purchase price are expected. We recognized a gain on the sale of the LoJack North America business of $ 4.1 million during the year ended February 28, 2022.
Concurrent with the closing of the transaction, we also entered into a Transition Services Agreement (the “TSA”) to provide support to Spireon in the transition of customers to its telematics solution and to provide recovery services to the existing installed base of LoJack North America customers, as an agent of Spireon, for a period of six months commencing March 15, 2021. Subsequently, the transition period was extended and then effectively terminated on March 31, 2022. As consideration for these services, Spireon reimbursed us for the direct and certain indirect costs, as well as certain overhead or administrative expenses related to operating the business. Additionally, we entered into a services agreement that commenced April 1, 2022 upon the expiration of the TSA, under which we will provide certain services related to the LoJack North America tower infrastructure for a period no longer than fifty-four months. As consideration for these services, Spireon will pay us a monthly service fee over the stipulated contract term. Further, we entered into a license agreement pursuant to which we license certain intellectual property rights related to the LoJack North America business in the U.S. and Canada to Spireon. In connection with the services provided to Spireon during the years ended February 28, 2023 and 2022, respectively, we incurred a total cost of $ 3.0 million and $ 4.4 million of which $ 1.6 million and $ 2.3 million was billed to Spireon for the services and the net amount of remaining of $ 1.4 million and $ 2.1 million was included within other income (expense) in the consolidated statements of comprehensive as these costs represent non-operating expenses.
The operating results and cash flows related to the LoJack North America operations are reflected as discontinued operations in the consolidated statements of comprehensive loss and the consolidated statements of cash flows for the years ended February 28, 2022 and 2021. For the year ended February 28, 2022, we have reported the operating results and cash flows related to the LoJack North America operations through March 14, 2021.
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The amounts in the statements of operations that are included in discontinued operations are summarized in the following table (in thousands):
Year Ended February 28,
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Intangible asset amortization
Restructuring
Impairment losses
Total operating expenses
Operating loss from discontinued operations
Gain on sale of discontinued operations
Net income (loss) from discontinued operations, net of tax
The amounts in the statements of cash flows that are included in discontinued operations are summarized in the following table (in thousands):
Year Ended February 28,
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from discontinued operations, net of tax
Adjustments to reconcile net income (loss) from discontinued operations to net cash provided by (used in) operating activities:
Depreciation
Intangible asset amortization
Stock-based compensation
Impairment losses
Gain on sale of discontinued operations
Non-cash operating lease cost
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued liabilities
Deferred revenue
Operating lease liabilities
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Net proceeds from sale of discontinued operations
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM DISCONTINUED OPERATIONS
Net change in cash and cash equivalents
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NOTE 3 – CONCENTRATION OF CUSTOMERS AND SUPPLIERS
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 industrial equipment industry accounted for 17 % , 18 % and 19 % of our consolidated revenue and 14 % , 12 % and 25 % of our consolidated accounts receivable as of and for the years ended February 28, 2023, 2022 and 2021, 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 Mexico and 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. Some of these manufacturers accounted for more than 10 % of our purchases and accounts payable as follows (rounded):
Year Ended February 28,
Inventory purchases:
Supplier A
Supplier B
Supplier C
Supplier D
As of February 28,
Accounts Payable:
Supplier A
Supplier B
Supplier C
Supplier D
We are currently reliant upon these manufacturers and suppliers for products. Although we believe that we can obtain products from other sources, the loss of a significant manufacturer or 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 the same terms from another manufacturer or supplier.
NOTE 4 – CASH, CASH EQUIVALENTS AND INVESTMENTS
The following tables summarize our financial instrument assets (in thousands):
As of February 28, 2023
Balance Sheet Classification of
Fair Value
Unrealized
Cash and
Gains
Fair
Cash
Other
Cost
(Losses)
Value
Equivalents
Assets
Cash
Level 1:
Money market funds
Mutual funds (1)
Total
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As of February 28, 2022
Balance Sheet Classification of
Fair Value
Unrealized
Cash and
Gains
Fair
Cash
Other
Cost
(Losses)
Value
Equivalents
Assets
Cash
Level 1:
Money market funds
Mutual funds (1)
Level 2:
Repurchase agreements
Total
Amounts represent various equities, bonds and money market mutual funds held in a “Rabbi Trust” and are restricted for payment obligations to non-qualified deferred compensation plan participants. In addition to the mutual funds above, our “Rabbi Trust” also included Corporate-Owned Life Insurance (COLI) starting in Fiscal 2020. As of February 28, 2023 , the cash surrender value of COLI was $ 5.7 million. See Note 9 for discussion of the deferred compensation plan.
NOTE 5 – ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
February 28,
Accounts receivable
Allowance for doubtful accounts
NOTE 6 – INVENTORIES
Inventories consist of the following (in thousands):
February 28,
Raw materials
Finished goods
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NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
Useful
February 28,
Life
Leasehold improvements
5 - 10 years
Recovery system components and law enforcement tracking units
7 to 10 years
Leased devices
2 to 5 years
Plant equipment and tooling
2 - 5 years
Office equipment, computers and furniture
3 - 5 years
Software
3 - 7 years
Less accumulated depreciation and amortization
Fixed assets not yet in service
Depreciation expense from continuing operations was $ 16.4 million , $ 17.4 million and $ 17.2 million for the fiscal years ended February 28, 2023, 2022, and 2021, respectively.
A portion of the recovery system components and law enforcement tracking units above represent the software development for and equipment attached to our tower infrastructure. During fiscal year ended February 28, 2021, we recorded impairment losses aggregating $ 9.0 million, which represented the net book value of property and equipment substantially related to the LoJack U.S. SVR operations. Impairment losses of $ 8.9 million for the fiscal year ended February 28, 2021 are included within the net loss from discontinued operations shown separately in our consolidated statement of comprehensive loss.
Fixed assets not yet in service consist primarily of capitalized internal-use software and certain tooling and other equipment that have not been placed into service. During fiscal year ended February 28, 2023, we wrote-off $ 0.4 million of fixed assets not yet in service that is included in restructuring charges in the consolidated statements of comprehensive loss as further discussed in Note 11, Restructuring.
NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in goodwill are as follows (in thousands):
Software & Subscription Services
Telematics
Products
Total
Balance as of February 28, 2022
Re-allocation
Effect of exchange rate change on goodwill
Balance as of February 28, 2023
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As further described in Note 1, Description of Business and Summary of Significant Accounting Policies , we began entering into subscription arrangements with customers who historically purchased MRM telematics products from us, which has resulted in growth in Software & Subscription Services revenues and a corresponding decline in Telematics Products revenues as we have transitioned most of the MRM telematics business to long-term subscription contracts. This transition was substantially completed in the fourth quarter of Fiscal 2023. As a result of this customer transition between reporting units, in the fourth quarter of Fiscal 2023, a portion of the goodwill previously associated with our Telematics Products reporting unit was re-allocated amongst the reporting units impacted by this customer transition.
Other intangible assets are comprised as follows (in thousands, except years):
Gross (2)
Accumulated Amortization (2)
Net
Useful
Life
Feb. 28,
Additions &
Adjustments,
net (1)
Feb. 28,
Feb. 28,
Amortization Expense
Feb. 28,
Feb. 28,
Feb. 28,
Developed technology
4 - 6 years
Tradenames
10 years
Customer relationships
10 - 15 years
Patents
5 years
(1) Amounts also include any net changes in intangible asset balances for the periods presented that resulted from foreign currency translation.
(2) This table excludes the gross value of fully amortized intangible assets totaling $ 38.9 million and $ 23.0 million at February 28, 2023 and February 28, 2022 , respectively.
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 Fiscal 2021, we determined that the prolonged secular decline in legacy LoJack US 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 including the LoJack tradename and dealer and customer relationships. Our assessment of the future cash flows generated by these assets concluded that an impairment loss was present. For the fiscal year ended February 28, 2021, we recorded an impairment loss aggregating $ 1.5 million, which was attributable to $ 1.0 million of US Dealer relationships and $ 0.5 million of developed technology. These are included within net from operations for fiscal years ended February 28, 2021.
Amortization expense of intangible assets from continuing operations was $ 5.3 million , $ 5.4 million and $ 4.8 million in fiscal years ended February 28, 2023, 2022 and 2021, respectively.
Estimated future amortization expense as of February 28, 2023 is as follows (in thousands):
Thereafter
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NOTE 9 – OTHER ASSETS
Other assets consist of the following (in thousands):
February 28,
Deferred product cost
Deferred compensation plan assets
Lease receivables, non-current
Prepaid commissions
Other
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 equity, bond, COLI and money market mutual funds 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 10 – FINANCING ARRANGEMENTS
Balances attributable to our financing arrangements consist of the following (in thousands):
Maturity
Effective
February 28,
Date
Interest Rate
2025 Convertible Notes, 2.00 % fixed rate (2)
August 1, 2025
Due to factors under revenue assignments
Total term debt
Unamortized discount and issuance costs (1)
Less: current portion of long-term term debt
Long-term debt, net of current portion
(1) The debt discount associated with the Convertible Notes and related unamortized debt issuance costs as of February 28, 2023 reflects the adoption impact of ASU 2020-06 effective March 1, 2022. See Note 1, Description of Business and Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements, for further information regarding the adoption of ASU 2020-06.
(2) The effective interest rate was 7.56 % prior to the adoption of ASU 2020-06.
The effective interest rates for the convertible notes include the interest on the notes and amortization of the debt issuance costs. As of February 28, 2023 and 2022, the fair value of the convertible notes, based on Level 2 inputs, was $ 201.0 million and $ 209.0 million , respectively.
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Revolving Credit Facility
On July 13, 2022, we replaced our revolving credit facility with JP Morgan Chase Bank, N.A. and we entered into a new revolving credit facility with PNC Bank, N.A., that provides for an asset-based senior secured revolving credit facility for borrowings up to an aggregate of $ 50.0 million, subject to certain conditions, including borrowing base provisions that limit borrowing capacity to 80 % of eligible accounts receivable and 50 % of eligible inventory. At our election, the borrowings under this revolving credit facility bear interest at either the Bloomberg short-term bank yield rate plus a margin of 2.50 % per annum or an alternate base rate plus a margin of 1.50 % per annum. We also pay an unused line fee ranging from 0.50 % to 0.75 % per annum, based on the level of borrowings, payable quarterly in arrears. Amounts owed under the revolving credit facility 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 revolving credit facility will terminate, and all outstanding loans will become due and payable on the earlier of July 13, 2025 and the date that is ninety days prior to the maturity date of our 2025 Convertible notes. The proceeds available under the revolving credit facility could be used for working capital and general corporate purposes, which could include acquisitions. Amounts available for borrowing under the revolving credit facility are reduced by the balance of any outstanding letters of credit. The revolving credit facility contains customary events of , that upon our may require us to pay all amounts outstanding and allow PNC Bank to on collateral. As of February 28, 2023 , there were no borrowings outstanding and $ 2.6 million of outstanding letters of credit under this revolving credit facility and total remaining borrowing availability was $ 34.2 million.
The revolving credit facility contains certain negative and affirmative covenants, including financial covenants that require us to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00 , measured as of the last day of each fiscal quarter if our liquidity position, consisting of specified cash balances plus unused availability on the revolving credit facility, falls below $ 40.0 million on such day. Additionally, the revolving credit facility contains a cash dominion trigger whereby PNC Bank may direct domestic cash balances and receipts to pay down borrowings under the revolving credit facility should our liquidity position, consisting of specified cash balances plus unused availability on the revolving credit facility, fall below $ 25.0 million at the end of any month. As of February 28, 2023, we were in compliance with our covenants under the revolving credit facility.
Convertible Senior Unsecured Notes - 2025 Convertible Notes
On July 20, 2018, we issued debt of $ 230.0 million aggregate principal amount of convertible senior unsecured notes due in August 2025 (“2025 Convertible Notes”). These notes were issued under an indenture, dated July 20, 2018 between us and The Bank of New York Mellon Trust Company, N.A., as trustee.
The proceeds from the sale of the 2025 Convertible Notes were $ 222.7 million, after deducting issuance costs of $ 7.3 million. We initially used approximately $ 90.0 million of the net proceeds from this offering to (i) pay the cost of the capped call transactions of $ 21.2 million; (ii) repurchase shares of our common stock of approximately $ 15.0 million; and (iii) repurchase in privately negotiated transactions approximately $ 50 million principal of our outstanding 2020 Convertible Notes for approximately $ 53.8 million.
Prior to the adoption of ASU 2020-06, as further discussed in Note 1, Description of Business and Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements, we accounted for our convertible debt as separate liability and equity components. The value assigned to the liability component was the estimated fair value, as of the issuance date, of a similar debt without the conversion feature. The difference between the principal amount of the debt and the estimated fair value of the liability component, representing the value of the embedded conversion option assigned to the equity component, was recorded as a debt discount on the issuance date. The fair value of the liability component was generally determined using a discounted cash flow analysis, in which the projected interest and principal payments are discounted back to the issuance date at a market interest rate that represents a Level 3 fair value measurement. The debt discount was amortized to interest expense using the effective interest method with an effective interest rate equal to the aforementioned market interest rate over the term of the debt. The remaining gross proceeds net of the liability component represented the fair value of the embedded conversion feature that was recorded as an increase in additional paid-in capital within the stockholders’ equity section. The associated deferred tax effect was recorded as a reduction of additional paid-in capital. Approximately $ 51.9 million, net of tax, was allocated to additional paid-in-capital upon issuance of these notes. The equity component was not re-measured as the embedded conversion option continued to meet the conditions for equity classification.
Further, the issuance costs related to the debt were also allocated to the liability and equity components based on the relative fair values. Issuance costs attributable to the liability component were recorded as a direct deduction from the carrying value of the debt and were being amortized to expense over the term of the debt using the effective
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interest method. The issuance costs attributable to the equity component were recorded as a charge to the additional paid-in capital within stockholders’ equity. Lastly, the deferred tax effect related to the equity component of the issuance costs were also recorded to additional paid-in capital as such costs are deductible for tax purposes.
The table below summarizes the liability and equity components of the 2025 Convertible Notes, the issuance costs and the applicable assumptions used for the calculation (in millions except initial conversion rate and per share amounts):
Initial conversion rate (shares per $ 1,000 principal amount)
Initial conversion price per share
Fair value of liability component upon issuance
Fair value measurement level
Level 3
Fair value of embedded equity component upon issuance
Deferred tax asset effect
Total issuance cost
Equity component
Deferred tax asset effect
Upon adoption of ASU 2020-06 on March 1, 2022, we reversed the separation of the debt and equity components and accounted for the Convertible Notes wholly as debt. We also reversed the amortization of the debt discount, with a cumulative effect to accumulated deficit on the adoption date. Prior to the adoption of this pronouncement, debt issuance costs attributable to the liability component were being amortized to interest expense using the effective interest method and debt issuance costs attributable to the equity component were netted with the equity component in Stockholders' equity. Effective March 1, 2022, we reversed the debt issuance costs attributable to the equity component and account for the entire amount as debt issuance costs that will be amortized as interest expense using the effective interest method, with a cumulative effect adjustment to retained earnings (accumulated deficit) on the adoption date. See Note 1, Description of Business and Summary of Significant Accounting Policies - Recently Adopted Accounting Pronouncements , for further information regarding the adoption of ASU 2020-06 and Note 15, Earnings (Loss) Per Share , for a description of the dilutive nature of the Convertible Notes.
In July 2018, in connection with the 2025 Convertible Notes, we entered into capped call transactions with certain option counterparties who were initial purchasers of the 2025 Convertible Notes. The capped call transactions are expected to reduce the potential dilution of earnings per share upon conversion of the 2025 Convertible Notes. Under the capped call transactions, we purchased options that in the aggregate relate to the total number shares of 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.
We elected to integrate the note hedges and capped call with the Notes for federal income tax purposes pursuant to applicable U.S. Treasury Regulations. Accordingly, the cost of the note hedges and capped call will be deductible for income tax purposes as original issue discount interest over the term of Notes.
2025 Convertible Notes Terms
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The 2025 Convertible Notes contain customary terms and conditions, including that upon certain events of default occurring and continuing, either the trustee, by notice to us, or the holders of at least 25% in aggregate principal amount of the then outstanding Notes, by notice to us and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the 2025 Convertible Notes then outstanding to become due and payable immediately. Such events of default include, without limitation, the default by us or any of our subsidiaries with respect to indebtedness for borrowed money in excess of $ 10 million and the entry of judgments for the payment of $ 15 million or more against us or any of our subsidiaries, which are not paid, discharged or stayed within 60 days.
The 2025 Convertible Notes bear interest at 2.00 % per year payable semiannually in arrears in cash on February 1 and August 1 of each year, beginning on February 1, 2019. The 2025 Convertible Notes will mature on August 1, 2025 , unless earlier converted, redeemed or repurchased by us in accordance with their terms. 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 rank senior in right of payment to any existing or future indebtedness which is subordinated by its terms, ranks equally in right of payment to any indebtedness that is not so subordinated, is structurally subordinated to all indebtedness and liabilities of our subsidiaries and is effectively junior to our secured indebtedness to the extent of the value of the assets securing such indebtedness.
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 rate and initial conversion price as noted above. Holders may convert their 2025 Convertible Notes at their option upon the occurrence of certain events, as defined in the indenture.
Upon the occurrence of a “make-whole fundamental change”, we will in certain circumstances increase the conversion rate for a specific period of time. Additionally, upon the occurrence of a “fundamental change”, holders of the notes may require us to repurchase their notes at a cash repurchase price equal to the principal amount of the notes to be repurchased, plus any accrued and unpaid interest. As of February 28, 2023, none of the conditions allowing the holders of the 2025 Convertible Notes to convert have been met.
2020 Convertible Notes
In May 2015, we issued $ 172.5 million aggregate principal amount convertible notes that were senior unsecured obligations and with interest at a rate of 1.625 % per year payable in cash on May 15 and November 15 of each year (“2020 Convertible Notes”).
In July 2018, we entered into separate, privately negotiated purchase agreements to repurchase approximately $ 50 million in aggregate principal amount of our 2020 Convertible Notes for $ 53.8 million including accrued interest, by using a portion of the net proceeds from the 2025 Convertible Notes. The repurchase was accounted for as an extinguishment of debt, not a modification of debt. We allocated the repurchase price of $ 53.7 million between the fair value of the liability of $ 47.6 million and the equity component of $ 6.1 million. The fair value of the liability component was determined using a discounted cash flow analysis at a market interest rate for nonconvertible debt of 4.36 % based on the remaining maturity of the 2020 Convertible Notes, which represented a Level 3 fair value measurement. The carrying value of the repurchased notes was $ 45.6 million, resulting in a loss on extinguishment of debt of $ 2.0 million. We also received proceeds of $ 3.1 million from the unwinding of the note hedge and warrants, which was recorded as additional paid-in capital.
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In October and November 2019, we entered into separate, privately negotiated purchase agreements to repurchase approximately $ 94.9 million in aggregate principal amount of these notes for $ 94.7 million. The repurchase was accounted for as an extinguishment of debt. The entire repurchase price of $ 94.7 million was considered as the fair value of the liability as the equity component was de minimis. The fair value of the liability was determined using a discounted cash flow analysis at a market interest rate for nonconvertible debt based on the remaining maturity of the 2020 Convertible Notes, which represented a Level 3 fair value measurement. The carrying value of the repurchased notes was $ 92.3 million, resulting in a loss on extinguishment of debt of $ 2.4 million. On May 15, 2020, we repaid the remaining principal balance of $ 27.6 million of the 2020 Convertible Notes.
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. The sales price paid represents a percentage of the total contract value (generally 80 %) due to Synovia at the beginning of the contract, with the total customer contract balance to be paid by the customers to the Factors over the contract period. The cost of the transaction was recorded as a contra-liability, and was recognized as interest expense over the term of the subscription contract using the effective interest method, while the assigned customer obligation is amortized to subscription revenues using the straight-line method.
These arrangements with the Factors met the criteria in ASC 470-10-25, Sales of Future Revenues or Various Other Measures of Income (“ASC 470”), which relates to cash received from an investor in exchange for a specified percentage or amount of revenue or other measure of income of a contractual right for a defined period. Under this guidance, the arrangement qualified as a debt instrument for accounting purposes due to Synovia’s significant continuing involvement in the generation of cash flows due to the Factors. Further, under ASC 805, Business Combination, we recorded the amounts due to the Factors as a debt obligation at fair value in the opening balance sheet and the outstanding amount is presented as part of our long-term debt in our consolidated balance sheet. The fair value of this debt of $ 19.7 million was determined using a pre-tax cost of debt of 4.7 % at the time of our acquisition of Synovia. The discount of $ 1.5 million will be amortized under the interest method. During the fiscal year ended February 28, 2023, 2022 and 2021, we recognized $ 0.1 million, $ 0.2 million and $ 0.5 million of interest expense related to this debt, respectively. The non-cash revenues recognized from this arrangement of $ 2.7 million , $ 4.6 million and $ 6.3 million are included as a non-cash activity in our consolidated statements of cash flows for fiscal year ended February 28, 2023, 2022 and 2021, respectively.
Paycheck Protection Program
On April 16, 2020, we received proceeds from a loan in the amount of $ 10 million (the "PPP Loan") from JPMorgan Chase Bank, N.A., as lender, pursuant to the Small Business Association ("SBA") Paycheck Protection Program (the "PPP") of the Coronavirus Aid, Relief, and Economic Security Act. At the time we applied for the PPP loan, we believed that we qualified to receive the funds pursuant to the PPP. On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the qualification requirements for a PPP loan. Out of an abundance of caution and in light of the new guidance, we repaid in full the principal and interest on the PPP Loan on April 27, 2020.
NOTE 11 – RESTRUCTURING CHARGES
In the fourth quarter of Fiscal 2023, to further progress our strategy of driving growth in our software and subscription services business, we implemented certain cost savings and cost efficiency measures to reduce our expense structure, better align our personnel to a subscription services business model, and terminate non-core initiatives not deemed to be key towards our strategic direction. The implementation of these measures resulted in a restructuring charge of $ 4.6 million for the fiscal year ended February 28, 2023, which was comprised of $ 1.5 million of severance and employee related costs and the write-off of $ 3.1 million of amounts previously capitalized in connection with technology initiatives that were determined would no longer provide future benefit. $ 2.3 million of these restructuring charges were attributable to the Telematics Products reportable segment, and $ 2.3 million of these restructuring charges were attributable to the Software & Subscription Services reportable segment.
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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 were not fully occupied. This plan was 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. Through Fiscal 2022, total restructuring charges related to this plan aggregated $ 17.9 million, and were comprised primarily of $ 11.1 million in severance and employee related costs, and $ 6.8 million for vacant office and manufacturing facilities as well as terminated tower infrastructure leases. Substantially all charges related to severance and employee costs were under the Telematics Products reportable segment.
The following table summarizes restructuring charges for the fiscal years ended February 28, 2023, 2022 and 2021 (in thousands):
Year Ended February 28,
Personnel
Facilities
Software
Total
Personnel
Facilities
Total
Personnel
Facilities
Total
Cost of revenue
Research and development
Selling and marketing
General and administrative
Total
Restructuring charges of $ 0.4 million, and $ 2.2 million for fiscal years ended February 28, 2022, and 2021 were included within discontinued operations, respectively.
The following table summarizes changes in restructuring liabilities, which are reported within other current and non-current liabilities (in thousands):
Personnel
Facilities
Total
Restructuring liabilities as of February 28, 2021
Charges
Payments
Restructuring liabilities as of February 28, 2022
Charges
Payments
Restructuring liabilities as of February 28, 2023
The restructuring liabilities related to personnel were included in accrued payroll and employee benefits in our consolidated balance sheets as of February 28, 2023 and 2022 .
NOTE 12 – LEASES
We have various non-cancelable operating leases for our offices in California, Texas, Massachusetts, Indiana and Minnesota 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 2033. Certain lease agreements contain renewal options, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate.
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The following table below presents lease-related assets and liabilities recorded on the consolidated balance sheet (in thousands):
February 28,
Classification
Assets
Operating lease right-of-use assets
Operating lease right-of-use assets
Liabilities
Operating lease liabilities (current)
Other current liabilities
Operating lease liabilities (noncurrent)
Operating lease liabilities
Total lease liabilities
Lease Costs
The following lease costs were included in our consolidated statements of comprehensive income (loss) as follows (in thousands):
Years ended February 28,
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
Supplemental Information
The table below presents supplemental information related to operating leases (in thousands, except weighted-average information):
Years ended February 28,
Cash paid for amounts included in the measurement of operating lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
Weighted average remaining lease term
4.0 years
3.8 years
Weighted average discount rate
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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 consolidated balance sheet as of February 28, 2023 (in thousands):
Thereafter
Total minimum lease payments
Less imputed interest
Present value of future minimum lease payments
Less current obligations under leases
Long-term lease obligations
NOTE 13 – INCOME TAXES
Our loss from continuing operations before income taxes consists of the following (in thousands):
Year Ended February 28,
Domestic
Foreign
Total loss before income taxes
The components of income tax provision consists of the following (in thousands):
Year Ended February 28,
Current:
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Income tax provision
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The income tax provision differs from the amount obtained by applying the statutory rate as follows (in thousands):
Year Ended February 28,
Income tax benefit at U.S. statutory federal rate
State income tax benefit, net of federal income tax effect
Foreign tax benefit (provision) exclusive of valuation allowance change
U.S. taxes on foreign income
Valuation allowance increases
Research and other tax credits
Tax expense on vested and exercised equity awards
Non-deductible expenses
Other, net
Total income tax provision
The components of net deferred income tax assets for income tax purposes are as follows (in thousands):
February 28,
Net operating loss carryforwards
Depreciation, amortization and impairments
Research and development credits
Stock-based compensation
Other tax credits
Capitalized research costs
ROU asset
Lease liabilities
Payroll and employee benefit accruals
Allowance for doubtful accounts
Other accrued liabilities
Convertible debt
Capitalized interest
Other, net
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Reported as:
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
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As of February 28, 2023, we maintained a valuation allowance with respect to certain of our deferred tax assets relating primarily to net operating losses and tax credits in domestic and certain foreign jurisdictions for which we cannot assert that they are more likely than not going to be realized. For Fiscal year 2023 , we increased the valuation allowance against our domestic and foreign net deferred tax assets by approximately $ 16.2 million and $ 2.1 million, respectively. For Fiscal year 2022 , we considered positive and negative evidence, in assessing our ability to realize our domestic and foreign net deferred tax assets and concluded that it is more likely than not that our domestic and many of our foreign net deferred tax assets will not be realized. As such, we increased the valuation allowance against our domestic and foreign net deferred tax asset by approximately $ 5.6 million and $ 1.3 million, respectively, for Fiscal year 2022. The amount of the net deferred tax assets considered realizable, however, could be adjusted in future periods in the event sufficient evidence is present to support a conclusion that it is more likely than not that all or a portion of our domestic deferred tax assets will be realized.
At February 28, 2023 , we had net operating loss carryforwards of approximately $ 33.6 million, $ 87.8 million and $ 24.0 million for federal, state and foreign purposes, respectively, expiring at various dates through fiscal year 2040. Approximately $ 47.0 and $ 37.3 million of federal and foreign net operating loss carryforwards do not expire, respectively. The federal net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code. If substantial changes in our ownership were to occur, there may be certain annual limitations on the amount of the NOL carryforwards that can be utilized.
As of February 28, 2023 , we had R&D tax credit carryforwards of $ 12.1 million and $ 12.6 million for federal and state income tax purposes, respectively. The federal R&D tax credits expire at various dates through fiscal year 2043. A substantial portion of the state R&D tax credits have no expiration date. As of February 28, 2023 , we had foreign tax credit carryforwards of $ 1.8 million for federal income tax purposes which expire beginning in fiscal year 2024 through fiscal year 2033.
We accounted for stock-based compensation pursuant to ASU 2016-09 and we have tax deductions on exercised stock options and vested restricted stock awards that did not exceed stock compensation expense amounts recognized for financial reporting purposes in Fiscal 2023and 2022 . The gross shortfall was $ 1.3 million and $ 0.7 million in Fiscal 2023 and 2022, respectively. We follow ASC Topic 740, Income Taxes , which clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. Management determined based on our evaluation of our income tax positions that we have uncertain tax benefit of $ 1.4 million, $ 1.6 million, and $ 1.8 million at February 28, 2023, 2022 and 2021, respectively, for which we have not yet recognized an income tax benefit for financial reporting purposes.
At February 28, 2023 , we decreased the uncertain tax benefits related to certain foreign net operating loss carryforwards and domestic tax credits by $ 0.2 million. At February 28, 2022 , we decreased the uncertain tax benefits related to certain foreign net operating loss carry forwards and domestic tax credits by $ 0.1 million. If total uncertain tax benefits were realized in a future period, it would result in a tax benefit of $ 0.7 million. As of February 28, 2023 and 2022 , our liabilities for uncertain tax benefits were netted against our deferred tax assets on our consolidated balance sheet. It is reasonably possible the amount of unrecognized tax benefits could be reduced within the next 12 months by at least $ 0.5 million.
We recognize interest and/or penalties related to uncertain tax positions in income tax expense. No amounts of interest and/or penalties have been accrued as of February 28, 2023.
Year Ended February 28,
Gross amounts of unrecognized tax benefits as of the beginning of the period
Decreases related to prior period tax positions
Decreases from lapse in statute of limitations
Foreign currency translation adjustment
Gross amounts of unrecognized tax benefits as of the end of the period
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We file income tax returns in the U.S. federal jurisdiction, various U.S. states, Canada, Ireland, Italy, United Kingdom, the Netherlands, Brazil, Spain, Mexico, Japan, Hong Kong and New Zealand. Certain income tax returns for the years 2018 through 2021 remain open to examination by U.S. federal and state tax authorities. To the extent allowed by law, the tax authorities may have the right to examine prior periods in which net operating losses or tax credits were generated and carried forward, and to make adjustments up to the net operating loss or tax credit carryforward amount. Our tax returns in the foreign jurisdictions remain open for examination for varying years by jurisdiction with certain jurisdictions being open for examination from 2017 to the present.
For the fiscal years ended February 28, 2023 and 2022 , we assert our intention to indefinitely reinvest foreign earnings in all our non-U.S. subsidiaries and accordingly, recorded no deferred income taxes on outside basis differences.
NOTE 14 – STOCKHOLDERS' EQUITY
Employee Stock Purchase Plan
On June 7, 2018, our Board of Directors adopted the CalAmp Corp. 2018 Employee Stock Purchase Plan (the “ESPP”), which was approved by our stockholders on July 25, 2018. The ESPP provides for the issuance of 1.75 million shares of our common stock. The first enrollment under the ESPP Plan commenced in February 2019. There are two enrollment periods each year that commence on February 1st and August 1st and lasts for six months. Stock-based compensation expense related to the ESPP Plan for the years ended February 28, 2023, 2022 and 2021 were $ 0.4 million , $ 0.4 million and $ 0.7 million respectively.
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Stock-Based Compensation
Our Board of Directors adopted the 2004 Incentive Stock Plan (the 2004 Plan) effective July 30, 2004, which provides for the granting of qualified and non-qualified stock options, restricted stock, performance stock units (PSUs), restricted stock units (RSUs), phantom stock and bonus stock to employees and directors. The primary purpose of the 2004 Plan is to enhance our ability to attract, motivate, and retain the services of qualified employees, officers and directors. Any stock options under the 2004 Plan will have a term of not more than 10 years and the vesting of the awards will be at the discretion of the Human Capital Committee of the Board of Directors but is not expected to exceed four years . We treat equity awards with multiple vesting tranches as a single award for expense attribution purposes and recognize compensation expense on a straight-line basis over the requisite service period of the entire award. As of February 28, 2023, there were 1.1 million award units in the 2004 Plan that were available for grant.
The following table summarizes our stock option activity (number of options and aggregate intrinsic value in thousands):
Number of
Options
Weighted Average Exercise Price
Weighted average remaining contractual life (years)
Aggregate intrinsic value
Outstanding at February 29, 2020
Granted
Exercised
Forfeited or expired
Outstanding at February 28, 2021
Granted
Exercised
Forfeited or expired
Outstanding at February 28, 2022
Granted
Exercised
Forfeited or expired
Outstanding at February 28, 2023
Exercisable at:
February 28, 2021
February 28, 2022
February 28, 2023
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No options were granted in fiscal years 2023, 2022, and 2021.
Changes in our outstanding restricted stock shares, PSUs and RSUs for the fiscal years ended February 28, 2023, 2022 and 2021 were as follows (shares 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
Granted
Vested
Forfeited
Outstanding at February 28, 2021
Granted
Vested
Forfeited
Outstanding at February 28, 2022
Granted
Vested
Forfeited
Outstanding at February 28, 2023
Stock-based compensation expense is included in the following captions of the consolidated statements of comprehensive loss (in thousands):
Year Ended February 28,
Cost of revenues
Research and development
Selling and marketing
General and administrative
Restructuring
As of February 28, 2023, there was $ 15.1 million of unrecognized stock-based compensation cost related to non-vested equity awards, which is expected to be recognized over a weighted-average remaining vesting period of 1.8 years.
Tax Benefits from Exercise of Stock Options and Vesting of Restricted Stock and RSU Awards
The aggregate fair value of stock options exercised and vested restricted stock and RSU awards as of the exercise date or vesting date was $ 5.6 million , $ 13.0 million and $ 9.4 million for fiscal years ended February 28, 2023, 2022, and 2021 , respectively. In connection with these equity awards, the excess stock compensation tax deductions were $ 0 for fiscal years presented.
NOTE 15 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and restricted stock-based awards using the treasury stock method. The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share amounts):
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Year Ended February 28,
Net loss from continuing operations
Net income (loss) from discontinued operations, net of tax
Net loss
Basic and diluted weighted average number of common shares outstanding
Basic and diluted net income (loss) per common share:
Loss from continuing operations
Income (loss) from discontinued operations
Net loss
Shares subject to anti-dilutive stock options and restricted stock-based awards were excluded from the computation of diluted earnings per share for the fiscal years presented which included outstanding stock options in the amount of 0.5 million, 0.7 million and 0.8 million as well as restricted stock based awards in the amount of 3.5 million, 2.9 million and 3.1 million for all fiscal years ended February 28, 2023, 2022, and 2021, respectively.
We have the option to pay cash, issue shares of common stock or any combination thereof for the aggregate amount due upon conversion of the convertible senior notes. It is our intent to settle the principal amount of these notes with cash. 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.
We adopted ASU 2020-06 on March 1, 2022 under the modified retrospective method and applied the new guidance to our 2025 Convertible Notes outstanding as of that date. We have not changed previously disclosed amounts or provided additional disclosures for comparative periods. ASU 2020-06 requires the if-converted method to be applied for all convertible instruments when calculating diluted earnings per share. Under the if-converted method, diluted earnings per share will be calculated assuming that all the Convertible Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive. Since we had a net loss for the year ended February 28, 2023, the 2025 Convertible Notes were determined to be anti-dilutive and therefore had no impact to basic or diluted net loss per share as a result of adopting the new pronouncement.
NOTE 16 – EMPLOYEE RETIREMENT PLAN
We maintain a 401(k) defined-contribution plan allowing eligible U.S.-based employees to contribute up to an annual maximum amount as set periodically by the Internal Revenue Service. The current matching contribution to the plan is equal to 100 % of the first 3 % of participants’ compensation contribution plus 50 % of the next 2 % contributed by the participant. We recorded expense for the matching contributions of $ 1.8 million, $ 1.6 million and $ 1.9 million in fiscal years ended February 28, 2023, 2022 and 2021 , respectively.
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NOTE 17 – OTHER FINANCIAL INFORMATION
Supplemental Balance Sheet Information
Other current liabilities consist of the following (in thousands):
February 28,
Operating lease liabilities
Omega litigation reserve
Customer deposits
Warranty reserves
Other
Other non-current liabilities consist of the following (in thousands):
February 28,
Deferred revenue
Deferred compensation plan liability
Deferred tax liability
Other
Supplemental Income Statement Information
Interest expense consists of the following (in thousands):
Year Ended February 28,
Interest expense on 2020 Convertible Notes:
Stated interest at 1.625 % per annum
Amortization of discount and issuance costs
Interest expense on 2025 Convertible Notes:
Stated interest at 2.00 % per annum
Amortization of discount and issuance costs
Other interest expense
Total interest expense
Supplemental Cash Flow Information
“Net cash (used in) provided by operating activities” in the consolidated statements of cash flows includes cash payments for interest and income taxes. The following is our supplemental schedule of cash payments for interest and income taxes and non-cash investing and financing activities (in thousands):
Year Ended February 28,
Cash payments for interest and income taxes:
Interest expense paid
Income tax paid, net of refunds
Non-cash investing and financing activities:
Accrued liability for capital expenditures
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Valuation and Qualifying Accounts
Following is our schedule of valuation and qualifying accounts for the last three years (in thousands):
Balance at beginning
of year
Charged (credited) to costs and expenses
Deductions
Balance at
end of year
Allowance for doubtful accounts:
Fiscal 2021
Fiscal 2022
Fiscal 2023
Warranty reserve:
Fiscal 2021
Fiscal 2022
Fiscal 2023
Deferred tax assets valuation allowance:
Fiscal 2021
Fiscal 2022
Fiscal 2023
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Omega patent claim
In December 2013, a patent infringement lawsuit was filed against us by Omega Patents, LLC (“Omega”), a non-practicing entity. Omega alleged that certain of our vehicle tracking products infringed on four patents owned by Omega. The parties commenced a mediation on April 12, 2022, and on May 17, 2022, CalAmp and Omega executed an agreement for a settlement and release and a covenant not to sue under certain patents. On June 1, 2022, we paid $ 4.9 million pursuant to this settlement agreement. The parties filed a Joint Stipulation of Dismissal With Prejudice on June 15, 2022, and on June 16, 2022, the court dismissed the case with prejudice.
Philips patent claim
On December 17, 2020, Koninklijke Philips N.V. (“Philips”) filed four separate legal actions against us, and several other companies, accusing the companies of infringing Philips’s 3G and 4G wireless standard-essential patents: (1) first, in the U.S. District Court, District of Delaware, Philips v. Quectel Wireless Solutions Co. Ltd. (“Quectel”), CalAmp, Xirgo Technologies, LLC (“Xirgo”), and Laird Connectivity, Inc. (“Laird”), Philips alleges that our location monitoring units infringe certain claims of U.S. Patent No. 7,831,271 (“the ’271 patent”), U.S. Patent No. 8,199,711 (“the ’711 patent”), U.S. Patent No. 7,554,943 (“the ’943 patent”), and U.S. Patent No. 7,944,935 (“the ’935 patent”) (all four patents collectively, the “Patents”); (2) second, in the U.S. District Court, District of Delaware, Philips v. Telit Wireless Solutions, Inc., Telit Communications Plc, (collectively, “Telit”), and CalAmp, Philips alleges that our location monitoring units and certain modules therein infringe certain claims of the Patents; (3) third, in the U.S. District Court, District of Delaware, Philips v. Thales DIS AIS USA LLC (F/K/A Gemalto IoT LLC “Gemalto”) F/K/A Cinterion Wireless Modules NAFTA LLC (“Cinterion”), Thales DIS AIS Deutschland GmbH (F/K/A Gemalto M2M GmbH), Thales USA, Inc., Thales S.A., (collectively, “Thales”), CalAmp, Xirgo, and Laird, Philips that our location monitoring units certain of the Patents, and (4) fourth, before The International Trade Commission (“ITC”), Philips v. Quectel, CalAmp, Xirgo, Laird, Thales, Gemalto, Cinterion, and Telit, Philips of section 337 of the U.S. Tariff Act based upon our importation into the United States, the sale for importation, and the sale within the United States after importation of certain UMTS (Universal Mobile Telecommunications System) and LTE (Long Term Evolution) cellular communication modules and products containing the same by reason of our location monitoring units that on certain of the Patents.
On April 1, 2022, the administrative law judge (“ALJ”) at the ITC issued a Final Initial Determination on the question of violation of section 337 (19 U.S.C. § 1337). The ALJ determined that a violation of section 337 has not occurred with respect to any of the Patents. On July 6, 2022, the ITC affirmed the Final Initial Determination of no violation of Section 337 and terminated the investigation and the deadline for any appeal has passed.
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While the district court case against Thales was recently reopened to set a status conference, the district court cases against Quectel and Telit are currently stayed. Considering the ITC’s determination of no infringement of any of the Patents we believe that we have strong defenses in the Delaware district court cases. Also, we believe we have strong indemnification claims against our communication module suppliers, and are entitled to have our defense costs and any losses resulting from these proceedings paid by those suppliers, who are co-defendants in these proceedings, should the stays be removed in the three district court cases. Currently, it is not feasible to predict with certainty the outcome of the three district court cases, and no specific amount of damages has been identified. Additionally, we believe the ultimate resolution of the proceedings, including indemnification and defense by our module suppliers, will not have a material adverse effect on our consolidated results of operations, financial condition, or cash flows.
In addition to the foregoing matters, from time to time as a normal consequence of doing business, various claims and litigation may be asserted or commenced against us. In particular, 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 will have a material adverse effect on our consolidated results of operations, financial condition or cash flows.
NOTE 19 – SEGMENT AND GEOGRAPHIC DATA
We operate under two reportable segments: Software & Subscription Services and Telematics Products. Our organizational structure is based on a number of factors that our CEO, the Chief Operating Decision Maker (“CODM”), uses to evaluate and operate the business, which include customer base, homogeneity of products, and technology for the fiscal years presented.
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 Programming 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 includes SaaS, professional services, devices sold with monitoring services and amortization of revenues and costs 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 and third party software and service solutions worldwide and are critical for applications demanding secure, reliable and business-critical communications. Telematics Products segment revenues consist primarily of distinct product sales.
Information by business segment is as follows (in thousands):
Year ended February 28, 2023
Operating Segments
Software & Subscription Services
Telematics Products
Corporate Expenses
Total
Revenues
Gross profit
Gross margin
Adjusted EBITDA
Year ended February 28, 2022
Operating Segments
Software & Subscription Services
Telematics Products
Corporate Expenses
Total
Revenues
Gross profit
Gross margin
Adjusted EBITDA
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Year ended February 28, 2021
Operating Segments
Software & Subscription Services
Telematics Products
Corporate Expenses
Total
Revenues
Gross profit
Gross margin
Adjusted EBITDA
The amount shown for each period in the “Corporate Expenses” column above consists of expenses that are not allocated to the business segments. These unallocated 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 primarily on revenue and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”), and we therefore consider Adjusted EBITDA to be a primary measure of operating performance of our operating segments. We define Adjusted EBITDA as earnings before investment income, interest expense, taxes, depreciation, amortization and stock-based compensation, impairment loss and other adjustments as identified below. The adjustments to our financial results prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) to calculate Adjusted EBITDA are itemized below (in thousands):
Year Ended February 28,
Net loss from continuing operations
Investment income
Interest expense
Income tax provision
Depreciation and amortization
Stock-based compensation
Non-recurring legal expenses, net of reversal of litigation provision
Restructuring
Impairment losses
Costs incurred in transition of LoJack North America business to acquiror
Other
Adjusted EBITDA
Our CODM does not obtain identifiable assets by segment because our businesses share resources, functions and facilities. We do not have significant long-lived assets outside the United States.
Revenues by geographic area are as follows (in thousands):
Year Ended February 28,
United States
EMEA
LATAM
APAC
All other
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 fiscal years ended February 28, 2023, 2022 and 2021 .
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