CALAMP CORP. Our discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the reporting periods. Actual results could differ materially from these estimates. The critical accounting policies listed below involve our more significant accounting judgments and estimates that are used in the preparation of the consolidated financial statements. These policies are described in greater detail in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") under Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedFebruary 28, 2022 , as filed with theU.S. Securities and Exchange Commission (the "SEC") onApril 28, 2022 , and include the following areas: • Revenue recognition; • Patent litigation and other contingencies; •Goodwill and long-lived assets; and • Deferred income tax assets and uncertain tax positions.
OUR COMPANY
We are 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 byCalAmp 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 inIrvine, California . We have two reportable segments, Software & Subscription Services and Telematics Products. Our organizational structure is based on a number of factors that our CEO, as the Chief Operating Decision Maker ("CODM"), uses to evaluate and operate the business, which include, but are not limited to, customer base, homogeneity of products, and technology. A description of the reportable business segments is provided below.
Software & Subscription Services
Our Software & Subscription Services segment offers cloud-based application enablement and telematics service platforms that facilitate integration of our own applications, as well as those of third parties, through open 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. Products and sales channels include OEM and MRM products. Adjusted EBITDA In addition to our GAAP results, we present Adjusted EBITDA as a supplemental non-GAAP measure of our performance. Our CEO, the 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 GAAP 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 provisions, gain from legal settlement, 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 enable more meaningful period-to-period comparisons. Pursuant to the rules and regulations of theSEC 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 14, Segment Information and Geographic Data, to the accompanying condensed consolidated financial statements for additional information related to Adjusted EBITDA by reportable segment and reconciliation to net loss. 25
--------------------------------------------------------------------------------
Recent Developments
COVID-19 Impact and Supply Chain Constraints
In
SinceMarch 2020 our revenues have been negatively impacted by COVID-19 as various small-to-medium sized customers postponed their capital expenditures due to the pandemic and related macro-economic uncertainties. More recently, we have experienced supply shortages as a result of global supply imbalances driven by the global pandemic. These global supply imbalances have negatively impacted all parts of our business, both in the form of reduced availability of components and devices as well as increased costs to procure available components and devices. It is difficult to predict the extent to which these factors will continue to impact our future business or operating results, which is highly dependent on uncertain future developments, including the severity of the continuing pandemic, the actions taken or to be taken by governments and private businesses in relation to its containment and resolution of supply chain issues and supply shortages. Because our business and operating results depend on telematics product sales, device installations and related subscription-based services, the ultimate effect of the pandemic and the current supply shortages may not be fully reflected in our operating results until future periods. We have considered all known and reasonably available information that existed throughout the six months ended and as ofAugust 31, 2022 , in making accounting judgements, estimates and disclosures. We are monitoring the potential effects of the health care related and economic conditions of COVID-19 in assessing certain matters including (but not limited to) supply chain disruptions and inflationary impacts, decreases in customer demand for our products and services, potential longer-term effects on our customer and distribution channels particularly in theU.S. and relevant end markets as well as other developments. If the impact results in longer term closures of businesses and economic recessionary conditions, we may recognize material asset impairments and charges for uncollectible accounts receivable in future periods.
Transition of MRM Telematics Customers to Subscription Arrangements
In the second half of fiscal 2022, we prompted a strategic shift with customerswho have historically purchased MRM telematics devices from us. These customers are being transitioned to new arrangements by way of bundling subscription services with telematics devices under multi-year (generally three years) subscription contracts. Our plan is to transition the entire base of MRM business to multi-year subscription contracts over the course of fiscal 2023. As a result, our financial results associated with such subscription arrangements will be reported within our Software & Subscription Services reporting segment prospectively from the effective date of such underlying contracts. In the short term, we expect that this will lead to significant 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.
Sale of LoJack North America Operations
Effective
As further described in Note 2, Discontinued Operations, to the accompanying condensed consolidated financial statements, theLoJack North America operations are presented as discontinued operations in the accompanying condensed consolidated financial statements for the six months endedAugust 31, 2021 . For the six months endedAugust 31, 2021 , we have reported the operating results and cash flows related to theLoJack North America operations throughMarch 14, 2021 . 26
--------------------------------------------------------------------------------
OPERATING RESULTS
Three months endedAugust 31, 2022 compared to three months endedAugust 31, 2021 : Revenue by Segment Three Months Ended August 31, 2022 2021 (In thousands) $ % of Revenue $ % of Revenue $ Change % Change Segment Software & Subscription Services$ 44,511 61.1 %$ 41,434 52.4 %$ 3,077 7.4 %
Telematics
Products 28,317 38.9 % 37,577 47.6 % (9,260 ) (24.6 %) Total$ 72,828 100.0 %$ 79,011 100.0 %$ (6,183 ) (7.8 %) 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 the second half of fiscal 2022, we began entering into subscription-based arrangements with customers that historically purchased MRM telematics hardware from us, a shift that favorably impacts revenues in our Software & Subscription Services segment and unfavorably impacts revenues in our Telematics Products segment. This is a transition that we expect will continue throughout fiscal 2023 as we work toward transitioning the entire MRM telematics customer base into subscription arrangements. In fiscal 2022 we began experiencing supply shortages driven by the global pandemic. These supply imbalances have intensified in the past few quarters and adversely impacted all parts of our business. We expect these supply shortages to continue for the foreseeable future as suppliers strive to create additional production capacity. As ofAugust 31, 2022 , our remaining contractual performance obligations were approximately$210 million , compared to$141 million as ofAugust 31, 2021 . 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 customer acquisitions within the government and municipality markets and connected car markets. Software & Subscription Services revenue increased by$3.1 million or 7.4% for the three months endedAugust 31, 2022 compared to the same period last year largely due to increased transportation and logistics revenues generated through the transition of MRM telematics hardware customers onto multi-year subscription arrangements, which commenced in the third quarter of fiscal 2022. Such customer transitions contributed$12.4 million to revenues during the three months endedAugust 31, 2022 . Partially offsetting this increase in revenues was$7.5 million of revenues in the prior year period associated with 3G to 4G equipment upgrades for specific larger customers that did not recur in the current year. Active subscribers increased by 32% in the three months endedAugust 31, 2022 when compared to the prior year period. 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$9.3 million or 24.6% for the three months endedAugust 31, 2022 compared to the same period last year. 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. We expect the conversion of the rest of our MRM customer base to continue over the next two to three quarters as we continue to implement our strategy to engage with our customers under subscription arrangements, which will lead to further decreases in Telematics Products segment revenues with an associated increase in Software & Subscription Services revenues. Telematics Products revenues have also been negatively impacted by the supply shortages described above, thereby limiting our ability to fulfill customer orders during the three months endedAugust 31, 2022 . Gross Profit by Segment Three Months Ended August 31, 2022 2021 (In thousands) $ % of Revenue $ % of Revenue $ Change % Change Segment Software & Subscription Services$ 20,865 46.9 %$ 21,332 51.5 %$ (467 ) (2.2 %) Telematics Products 8,147 28.8 % 12,038 32.0 % (3,891 ) (32.3 %) Gross profit$ 29,012 39.8 %$ 33,370 42.2 %$ (4,358 ) (13.1 %) 27
-------------------------------------------------------------------------------- Consolidated gross profit decreased by$4.4 million or 13.1% for the three months endedAugust 31, 2022 compared to the same period last year largely due to decreased revenues in our Telematics Products business. Consolidated gross margin decreased by 240 basis points for the three months endedAugust 31, 2022 compared to the same period last year primarily due to an unfavorable shift in customer and product mix coupled with increased costs incurred in the manufacture and procurement of our telematics devices. These negative impacts to gross margin were partially offset by the increased proportion of overall sales occurring within Software & Subscription Services, which has a higher margin profile, in the current year period. Software & Subscription Services: Gross profit decreased by$0.5 million or 2.2% for the three months endedAugust 31, 2022 compared to the same period last year, and gross margin decreased by 460 basis points primarily due to customer mix and increased costs in the manufacture and procurement of our telematics devices. Telematics Products: Gross profit decreased by$3.9 million or 32.3% for the three months endedAugust 31, 2022 compared to the same period last year primarily due to decreased revenues. Gross margin decreased by 320 basis points primarily due to product mix and increased costs in the manufacture and procurement of our telematics devices. As mentioned above, we are presently experiencing adverse impacts to revenues as a result of global supply shortages of certain components, which is also leading to cost increases on many of these components. As a result, in the coming quarters we may continue to experience lower gross margins if we are unable to effectively offset the impacts of these cost increases. Operating Expenses Three Months Ended August 31, 2022 2021 (In thousands) $ % of Revenue $ % of Revenue $ Change % Change Research and development$ 6,757 9.3 %$ 7,729 9.8 %$ (972 ) (12.6 %) Selling and marketing 12,734 17.5 % 12,047 15.2 % 687 5.7 % General and administrative 13,530 18.6 % 13,198 16.7 % 332 2.5 % Intangible asset amortization 1,330 1.8 % 1,394 1.8 % (64 ) (4.6 %) Total$ 34,351 47.2 %$ 34,368 43.5 %$ (17 ) 0.0 % Consolidated research and development expense decreased by$1.0 million or 12.6% for the three months endedAugust 31, 2022 compared to the same period last year 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 offering. Consolidated selling and marketing expense increased by$0.7 million or 5.7% for the three months endedAugust 31, 2022 compared to the same period last year primarily due to increased compensation costs resulting from changes in the composition of our salesforce to drive sales of our telematics subscription services.
Consolidated general and administrative expenses increased slightly for the
three months ended
Amortization of intangibles decreased slightly for the three months ended
Non-operating Income (Expense)
Investment income (loss) decreased to a loss of
Interest expense decreased to$1.5 million for the three months endedAugust 31, 2022 from$3.8 million for the three months endedAugust 31, 2021 due to the adoption of ASU 2020-06 effectiveMarch 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 condensed consolidated financial statements. Other non-operating expense was$0.5 million for the three months endedAugust 31, 2022 as compared to$0.7 million for the three months endedAugust 31, 2021 , and was largely comprised of costs incurred related to the wind down and transition of theLoJack North America business as well as net foreign currency exchange rate losses. 28
--------------------------------------------------------------------------------
Overall Profitability Measures
Net Loss:
GAAP-basis net loss for the three months endedAugust 31, 2022 was$7.5 million compared to a net loss of$5.4 million in the three months endedAugust 31, 2021 . The change in the net loss was largely driven by lower revenues in the current year period. Adjusted EBITDA: Three Months Ended August 31, (In thousands) 2022 2021 $ Change % Change Segment Software & Subscription Services$ 6,623 $ 9,638 $ (3,015 ) (31.3 %) Telematics Products (1,244 ) (378 ) (866 ) 229.1 % Corporate Expenses (613 ) (959 ) 346 36.1 % Total Adjusted EBITDA$ 4,766 $ 8,301 $ (3,535 ) (42.6 %) Adjusted EBITDA for Software & Subscription Services decreased$3.0 million compared to the same period last year primarily due to lower gross margins and higher operating expenses as a result of investments we are making to develop, market and sell our telematics solutions, partially offset by higher revenues. Adjusted EBITDA for Telematics Products decreased$0.9 million compared to the same period last year as a result of decreased revenues. Corporate Expenses decreased by$0.3 million compared to the same period last year.
See Note 14, Segment Information and Geographic Data, to the accompanying condensed consolidated financial statements for information related to Adjusted EBITDA by reportable segment and a reconciliation to GAAP-basis net loss.
Income Tax Provision
We evaluate our estimated annual effective tax rate ("ETR") on a quarterly basis
based on current and forecasted operating results. The relationship between our
income tax provision or benefit and our pretax book income or loss can vary
significantly from period to period considering, among other factors, the
overall level of pretax book income or loss and changes in the blend of
jurisdictional income or loss that is taxed at different rates and changes in
valuation allowances. Consequently, our ETR may fluctuate significantly period
to period and may make quarterly comparisons less meaningful.
Income tax expense was $0.1 million for the three months ended August 31, 2022 ,
compared to income tax expense of $0.3 million in the same period last year. The
$0.2 million decrease in tax expense was primarily driven by a decrease in
pre-tax income attributable to one of our foreign subsidiaries in the current
period.
Six months ended August 31, 2022 compared to six months ended August 31, 2021 :
Revenue by Segment
Six Months Ended August 31,
2022 2021
(In thousands) $ % of Revenue $ % of Revenue $ Change % Change
Segment
Software & Subscription
Services $ 84,068 61.1 % $ 76,477 48.2 % $ 7,591 9.9 %
Telematics Products 53,486 38.9 % 82,208 51.8 % (28,722 ) (34.9 %)
Total $ 137,554 100.0 % $ 158,685 100.0 % $ (21,131 ) (13.3 %)
Software & Subscription Services revenue increased by $7.6 million or 9.9% for
the six months ended August 31, 2022 compared to the same period last year
largely due to increased transportation and logistics revenues generated through
the transition of MRM telematics hardware customers onto multi-year subscription
arrangements, which commenced in the third quarter of fiscal 2022. Such customer
transitions contributed $20.9 million to revenues during the six months ended
August 31, 2022 . Partially offsetting this increase in revenues was $10.5
million of revenues in the prior year period associated with 3G to 4G equipment
upgrades for specific larger customers that did not recur in the current year.
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 decreased by $28.7 million or 34.9% for the six
months ended August 31, 2022 compared to the same period last year. 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. We expect the conversion of the rest of our MRM
customer base to continue over the next two to three quarters as we continue to
implement our strategy to engage with our customers under subscription
29
--------------------------------------------------------------------------------
arrangements, which will lead to further decreases in Telematics Products
segment revenues with an associated increase in Software & Subscription Services
revenues. Telematics Products revenues have also been negatively impacted by the
supply shortages described above, thereby limiting our ability to fulfill
customer orders during the three months ended August 31, 2022 .
Gross Profit by Segment
Six Months Ended August 31,
2022 2021
(In thousands) $ % of Revenue $ % of Revenue $ Change % Change
Segment
Software &
Subscription
Services $ 38,923 46.3 % $ 38,154 49.9 % $ 769 2.0 %
Telematics
Products 15,736 29.4 % 27,663 33.7 % (11,927 ) (43.1 %) Gross profit$ 54,659 39.7 %$ 65,817
41.5 %
Consolidated gross profit decreased by$11.2 million or 17.0% for the six months endedAugust 31, 2022 compared to the same period last year largely due to decreased revenues in our Telematics Products business. Consolidated gross margin decreased by 180 basis points for the six months endedAugust 31, 2022 compared to the same period last year primarily due to an unfavorable shift in customer and product mix coupled with increased costs incurred in the manufacture and procurement of our telematics devices. These negative impacts to gross margin were partially offset by the increased proportion of overall sales occurring within Software & Subscription Services, which has a higher margin profile, in the current year period. Software & Subscription Services: Gross profit increased by$0.8 million or 2.0% for the six months endedAugust 31, 2022 compared to the same period last year, primarily as a result of increased revenues. Gross margin decreased by 360 basis points primarily due to customer mix and increased costs in the manufacture and procurement of our telematics devices. Telematics Products: Gross profit decreased by$11.9 million or 43.1% for the six months endedAugust 31, 2022 compared to the same period last year primarily due to decreased revenues. Gross margin decreased by 430 basis points primarily due to product mix and increased costs in the manufacture and procurement of our telematics devices. As mentioned above, we are presently experiencing adverse impacts to product sales as a result of global supply shortages of certain components, which is also leading to cost increases on many of these components. As a result, in the coming quarters we may continue to experience lower gross margins if we are unable to effectively offset the impacts of these cost increases. Operating Expenses Six Months Ended August 31, 2022 2021 (In thousands) $ % of Revenue $ % of Revenue $ Change % Change Research and development$ 13,757 10.0 %$ 14,669 9.2 %$ (912 ) (6.2 %) Selling and marketing 24,212 17.6 % 24,509 15.4 % (297 ) (1.2 %) General and administrative 28,692 20.9 % 26,220 16.5 % 2,472 9.4 % Intangible asset amortization 2,672 1.9 % 2,647 1.7 % 25 0.9 % Total$ 69,333 50.4 %$ 68,045 42.9 %$ 1,288 1.9 % Consolidated research and development expense decreased by$0.9 million or 6.2% for the six months endedAugust 31, 2022 compared to the same period last year 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 offering . Consolidated selling and marketing expense decreased slightly for the six months endedAugust 31, 2022 compared to the same period last year. We expect to continue to make changes in the composition of our salesforce to drive sales of our telematics subscription services. Consolidated general and administrative expenses increased by$2.5 million or 9.4% for the six months endedAugust 31, 2022 compared to the same period last year primarily driven by increased legal fees and the recording of$1.9 million of incremental litigation reserves related to the final settlement of the Omega legal matter, which is described in Note 15, Legal Proceedings, to the accompanying condensed consolidated financial statements.
Amortization of intangibles increased slightly for the six months ended
30
--------------------------------------------------------------------------------Non-operating Income (Expense)
Investment income (loss) decreased to a loss of$0.2 million for the six months endedAugust 31, 2022 from investment income of$1.1 million for the six months endedAugust 31, 2021 . The decrease was primarily driven by lower investment returns on invested funds. Interest expense decreased to$3.0 million for the six months endedAugust 31, 2022 from$7.7 million for the six months endedAugust 31, 2021 due to the adoption of ASU 2020-06 effectiveMarch 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 condensed consolidated financial statements. Other non-operating expense was$1.4 million for the six months endedAugust 31, 2022 as compared to$2.0 million for the six months endedAugust 31, 2021 , and was largely comprised of costs incurred related to the wind down and transition of theLoJack North America business as well as, to a lesser extent, net foreign currency exchange rate losses.
Net Income from Discontinued Operations, Net of Tax
Net income from discontinued operations, net of tax was$4.1 million for the six months endedAugust 31, 2021 and related to the sale of theLoJack North America business that was completed onMarch 15, 2021 . See Note 2, Discontinued Operations, to the accompanying condensed consolidated financial statements for additional information.
Overall Profitability Measures
Net Loss:
GAAP-basis net loss for the six months endedAugust 31, 2022 was$19.7 million compared to a net loss of$7.4 million in the six months endedAugust 31, 2021 . The change in the net loss was largely driven by lower revenues in the current year period and the gain recognized on the sale of theLoJack North America business in the prior year period Adjusted EBITDA: Six Months Ended August 31, (In thousands) 2022 2021 $ Change % Change Segment
Software & Subscription Services
(31.9 %) Telematics Products (1,991 ) 3,254 (5,245 ) (161.2 %) Corporate Expenses (1,965 ) (2,100 ) 135 6.4 % Total Adjusted EBITDA$ 6,622 $ 16,686 $ (10,064 ) (60.3 %) Adjusted EBITDA for Software & Subscription Services decreased$5.0 million compared to the same period last year primarily due to lower gross margins and higher operating expenses as a result of investments we are making to develop, market and sell our telematics solutions, partially offset by higher revenues. Adjusted EBITDA for Telematics Products decreased$5.3 million compared to the same period last year as a result of the decrease in revenues. Corporate Expenses decreased by$0.1 million compared to the same period last year.
See Note 14, Segment Information and Geographic Data, to the accompanying condensed consolidated financial statements for information related to Adjusted EBITDA by reportable segment and a reconciliation to GAAP-basis net loss.
Income Tax Provision
Income tax expense was$0.4 million for the six months endedAugust 31, 2022 , compared to$0.6 million in the same period last year. The$0.2 million decrease in tax expense was primarily driven by a decrease in pre-tax income attributable to one of our foreign subsidiaries in the current period.
LIQUIDITY AND CAPITAL RESOURCES
Consistent with fiscal 2022, our primary recurring 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. Our immediate sources of liquidity are cash and cash equivalents, and our revolving credit facility. As ofAugust 31, 2022 , we have$47.7 million of cash and cash equivalents and$34 million available under our revolving credit facility. We expect to continue to finance our operations with cash on hand and cash generated from operations. See Note 1, Description of Business, Basis of Presentation and Summary of Significant Accounting Policies, for additional information on the Company's liquidity. 31 -------------------------------------------------------------------------------- OnJuly 13, 2022 , we replaced our revolving credit facility withJP Morgan Chase Bank, N.A. and we entered into a new revolving credit facility withPNC 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 ofJuly 13, 2025 and the date that is ninety days prior to the maturity date of our 2025 Convertible notes. Borrowings under our existing 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. As ofAugust 31, 2022 , there were no borrowings outstanding on this revolving credit facility. We are a defendant in various legal proceedings involving intellectual property claims and contract disputes. OnMay 17, 2022 , we executed an agreement with Omega for the settlement and release of the Omega claim and a covenant not to sue under certain patents and onJune 1, 2022 , we paid$4.9 million pursuant to that settlement agreement. OnJune 16, 2022 , the court dismissed the Omega case with prejudice. Regarding the Philips patent infringement claim, the ITC affirmed the Final Initial Determination of the administrative law judge of no violation of Section 337 and terminated the investigation onJuly 6, 2022 . To date Philips has not exercised any appeal right it may have.The Delaware District Court cases are stayed pending resolution of the ITC matter, and may be reinstated after Philips' appeal rights expire. 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 condensed consolidated results of operations, financial condition and cash flows.
See Note 15, Legal Proceedings, of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information on legal proceedings.
Sale of LoJack North America Operations
OnMarch 14, 2021 , we entered into an agreement withSpireon pursuant to which we sold certain assets and transferred certain liabilities of theLoJack North America business for a purchase price of$8.0 million . The transaction was completed effectiveMarch 15, 2021 and we received net proceeds of approximately$6.6 million . Subsequently, onNovember 9, 2021 , the purchase price was reduced by$0.9 million , which was paid toSpireon , due to final working capital adjustments. We also entered into a Transition Service Agreement withSpireon onMarch 15, 2021 ("TSA") to supportSpireon in the transition ofLoJack North America customers and to provide recovery services to the existing installed base ofLoJack North America customers as an agent ofSpireon , which effectively terminated onMarch 31, 2022 . During the service period, we invoicedSpireon for certain costs incurred in operating this business. We also entered into a post-TSA Services Agreement withSpireon onMarch 15, 2021 ("SA"), that commencedApril 1, 2022 upon the expiration of theTSA , under which we will continue to provide certain services related to theLoJack 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.
Future Cash Obligations
During the second quarter of fiscal 2023, there were no significant changes to our estimates of future payments under our fixed contractual obligations and commitments as presented in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for our fiscal year endedFebruary 28, 2022 as filed with theSEC onApril 28, 2022 .
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 discount and debt issue costs, deferred income taxes, amortization of certain revenue assignment arrangements and the effect of changes in components of working capital. Our cash flow from operating activities are attributable to our net loss as well as how well we manage our working capital, which is dictated by the volume of products we purchase from our manufacturers or suppliers and then sell to our customers along with the payment and collection terms that we negotiate with them. We purchase a majority of our products from significant suppliers located inAsia andMexico that generally provide us 60-day payment terms for products purchased. Our significant customers are located inthe 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 customerswho previously purchased telematics devices from us. While these subscription arrangements create recurring multi-year revenue, they elongate the cash 32 -------------------------------------------------------------------------------- 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. We anticipate that this trend will continue over at least the next six months as we continue our efforts to transition our entire MRM telematics customer base onto similar multi-year subscription arrangements. For the six months endedAugust 31, 2022 , net cash used in operating activities was$25.7 million and net loss was$19.7 million . Our non-cash expenses from continuing operations, comprised principally of depreciation, intangible asset amortization, stock-based compensation expense, amortization of debt discount and issuance costs, noncash operating lease costs and changes in deferred income taxes totaled$19.5 million . These non-cash expenses were slightly offset by non-cash revenues of$1.5 million related to acquired revenue assignment arrangements. Changes in operating assets and liabilities from continuing operations used$23.9 million of cash, largely as a result of the increase in accounts receivable and the decrease in deferred revenue. Both the increase in accounts receivable and decrease in deferred revenue were driven by differences in timing of collections under new subscription arrangements such that less cash is collected at contract inception. Operating cash flows were favorably impacted by the timing of payments on accounts payable. For the six months endedAugust 31, 2021 , net cash provided by operating activities was$10.5 million and net loss was$7.4 million . Our non-cash expenses from continuing operations, comprised principally of depreciation, intangible asset amortization, stock-based compensation expense, amortization of debt discount and issue costs, noncash operating lease costs and changes in deferred income taxes totaled$23.9 million . These non-cash expenses were partially offset by non-cash revenues of$2.6 million related to acquired revenue assignment arrangements. Changes in operating assets and liabilities from continuing operations provided$1.0 million of cash, primarily driven by the impact of lower inventory levels, partly offset by a net decrease in accounts payable. Net cash used in discontinued operations was$0.4 million .
Cash flow from investing activities
For the six months endedAugust 31, 2022 and 2021, our net cash used in investing activities of continuing operations was$4.9 million and$6.6 million , respectively. In each of these periods, our primary investing activities consisted of capital expenditures. We expect that we will make additional capital expenditures in the future, including the 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$6.6 million during the six months endedAugust 31, 2021 and was comprised of cash proceeds received from the sale of theLoJack North America business.
Cash flow from financing activities
For the six months endedAugust 31, 2022 and 2021, our net cash used in financing activities was$1.1 million and$3.1 million , respectively, driven primarily by payments for taxes related to the net share settlement of vested equity awards. We continue to monitor the impact of the pandemic and supply chain constraints on our operating results and liquidity as they have had an unfavorable impact on our financial condition and results of operations and we believe the pandemic and supply chain constraints may continue to have an unfavorable impact going forward.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-Q which include, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions, projections and other information regarding future performance, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "may", "will", "could", "plans", "intends", "seeks", "believes", "anticipates", "expects", "estimates", "judgment", "goal", and variations of these words and similar expressions, are intended to identify forward-looking statements. These forward-looking statements reflect our current views with respect to future events and financial performance and are subject to certain risks and uncertainties that are difficult to predict, including, without limitation, product demand, competitive pressures and pricing declines in our markets, the timing of customer approvals of new product designs, intellectual property infringement claims, interruption or failure of our Internet-based systems used to wirelessly configure and communicate with the tracking and monitoring devices that we sell, global component supply shortages due to ongoing supply chain constraints, the effect of tariffs on exports fromChina and other countries, the ongoing effects of the COVID-19 pandemic, and other risks and uncertainties that are set forth in Part I, Item 1A of the Annual Report on Form 10-K for the fiscal year endedFebruary 28, 2022 as filed with theSEC onApril 28, 2022 and in Part II, Item 1A of the Quarterly Report on Form 10-Q for the quarter endedMay 31, 2022 , as filed with theSEC onJune 23, 2022 . Such risks and uncertainties could cause actual results to differ materially from historical or anticipated results. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 33
--------------------------------------------------------------------------------
© Edgar Online, source
