XATA Xrs Corporation (MM)

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2009 or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File Number: 0-27166

XATA Corporation

 

(Exact Name of Registrant as Specified in its Charter)

Minnesota		41-1641815
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

965 Prairie Center Drive, Eden Prairie, Minnesota 55344 (Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (952) 707-5600

  (Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  o      No  o

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of April 24, 2009, the following securities of the Registrant were outstanding: 8,790,769 shares of Common Stock, $.01 par value per share, 1,964,429 shares of Series B Preferred Stock, 1,269,036 shares of Series C Preferred Stock, 1,566,580 shares of Series D Preferred Stock and 1,355,857 shares of Series E Preferred Stock.

 

 

XATA Corporation
Index

						Page No.
PART I.		FINANCIAL INFORMATION
		Item 1.		Consolidated Financial Statements:
				Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2009 and 2008			3
				Consolidated Balance Sheets as of March 31, 2009 and September 30, 2008			4
				Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended March 31, 2009 and the Twelve Months Ended September 30, 2008			5
				Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2009 and 2008			6
				Notes to Consolidated Financial Statements			7
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operation			25
		Item 4.		Controls and Procedures			33
PART II.		OTHER INFORMATION
		Item 1.		Legal Proceedings			34
		Item 1A.		Risk Factors			34
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			34
		Item 3.		Defaults upon Senior Securities			34
		Item 4.		Submission of Matters to a Vote of Security Holders			34
		Item 5.		Other Information			35
		Item 6.		Exhibits			35
SIGNATURES
EXHIBITS
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

XATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

		For the Three Months Ended								For the Six Months Ended
		March 31,								March 31,
		2009				2008				2009				2008
Revenue		$	16,895			$	12,129			$	31,538			$	19,816
Costs and expenses
Cost of goods sold			9,263				6,509				16,858				10,914
Selling, general and administrative			5,752				5,593				11,653				8,993
Research and development			1,403				1,105				2,810				2,114
Total costs and expenses			16,418				13,207				31,321				22,021
Operating income (loss)			477				(1,078	)			217				(2,205	)
Interest income			33				110				72				241
Interest expense			(419	)			(370	)			(869	)			(387	)
Income (loss) before income taxes			91				(1,338	)			(580	)			(2,351	)
Income tax expense			—				—				—				—
Net income (loss)			91				(1,338	)			(580	)			(2,351	)
Preferred stock dividends			(50	)			(47	)			(99	)			(94	)
Preferred stock deemed dividends			(484	)			—				(479	)			(43	)
Net loss to common shareholders		$	(443	)		$	(1,385	)		$	(1,158	)		$	(2,488	)
Net loss per common share — basic and diluted		$	(0.05	)		$	(0.17	)		$	(0.14	)		$	(0.30	)
Weighted average common and common share equivalents Basic and diluted			8,524				8,306				8,500				8,234

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

XATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

		March 31,				September 30,
		2009				2008
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	3,077			$	8,904
Accounts receivable, less allowances of $431 and $333			9,656				11,365
Inventories			4,022				2,735
Deferred product costs			1,873				1,474
Current portion of investment in sales-type leases			566				768
Prepaid expenses and other current assets			665				691
Total current assets			19,859				25,937
Equipment and leasehold improvements, net			3,802				3,925
Intangible assets, net			11,572				12,420
Goodwill			3,011				3,011
Deferred product costs, net of current portion			2,967				2,685
Investment in sales-type leases, net of current portion			100				310
Debt financing costs, net			583				708
Total assets		$	41,894			$	48,996
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current portion of long-term obligations		$	93			$	1,845
Accounts payable			5,101				4,394
Accrued expenses			4,919				6,574
Deferred revenue			5,475				4,996
Total current liabilities			15,588				17,809
Long-term obligations, net of current portion			8,571				16,342
Deferred revenue, net of current portion			7,502				7,848
Other long-term liabilities			904				805
Total liabilities			32,565				42,804
Shareholders’ equity
Preferred stock, no par, 10,000 shares authorized:
Series B, 4% convertible, 2,250 shares designated; shares issued and outstanding: 1,964 at March 31, 2009 and 1,926 at September 30, 2008			4,645				5,181
Series C, convertible, 1,400 shares designated; 1,269 shares issued and outstanding at March 31, 2009 and September 30, 2008			4,426				4,845
Series D, convertible, 1,600 shares designated; 1,567 shares issued and outstanding at March 31, 2009 and September 30, 2008			5,279				5,937
Series E, convertible, 1,400 shares designated; 1,356 shares issued and outstanding at March 31, 2009			2,414				—
Common stock, par value $0.01 per share; 25,000 shares authorized; shares issued and outstanding: 8,791 at March 31, 2009 and 8,745 at September 30, 2008			88				87
Additional paid-in capital			31,727				28,234
Accumulated deficit			(39,250	)			(38,092	)
Total shareholders’ equity			9,329				6,192
Total liabilities and shareholders’ equity		$	41,894			$	48,996

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

XATA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands)
(Unaudited)

										Series B								Series C								Series D								Series E								Additional
		Common Stock								Preferred Stock								Preferred Stock								Preferred Stock								Preferred Stock								Paid-In				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Total
Balance at September 30, 2007			8,516			$	85				1,851			$	4,921				1,269			$	4,845				1,567			$	5,937				—			$	—			$	25,760			$	(34,470	)		$	7,078
Common stock issued on exercise of options			15				—				—				—				—				—				—				—				—				—				44				—				44
Issuance of restricted shares of common stock			151				1				—				—				—				—				—				—				—				—				(1	)			—				—
Stock based compensation			—				—				—				—				—				—				—				—				—				—				1,588				—				1,588
Forfeiture of restricted shares of common stock			(28	)			—				—				—				—				—				—				—				—				—				—				—				—
Issuance of common stock and warrants			91				1				—				—				—				—				—				—				—				—				843				—				844
Preferred stock dividends			—				—				75				191				—				—				—				—				—				—				—				(192	)			(1	)
Preferred stock deemed dividends			—				—				—				69				—				—				—				—				—				—				—				(69	)			—
Net loss			—				—				—				—				—				—				—				—				—				—				—				(3,361	)			(3,361	)
Balance at September 30, 2008			8,745				87				1,926				5,181				1,269				4,845				1,567				5,937				—				—				28,234				(38,092	)			6,192
Issuance of restricted shares of common stock			48				1				—				—				—				—				—				—				—				—				(1	)			—				—
Stock based compensation			—				—				—				—				—				—				—				—				—				—				793				—				793
Forfeiture of restricted shares of common stock			(2	)			—				—				—				—				—				—				—				—				—				—				—				—
Issuance of preferred stock and warrants			—				—				—				—				—				—				—				—				1,356				2,414				511				—				2,925
Record the beneficial conversion feature			—				—				—				—				—				—				—				—				—				(484	)			484				—				—
Preferred stock dividends			—				—				38				98				—				—				—				—				—				—				—				(99	)			(1	)
Preferred stock deemed dividends			—				—				—				(5	)			—				—				—				—				—				484				—				(479	)			—
Adjustment to reflect value of beneficial conversion feature			—				—				—				(629	)			—				(419	)			—				(658	)			—				—				1,706				—				—
Net loss			—				—				—				—				—				—				—				—				—				—				—				(580	)			(580	)
Balance at March 31, 2009			8,791			$	88				1,964			$	4,645				1,269			$	4,426				1,567			$	5,279				1,356			$	2,414			$	31,727			$	(39,250	)		$	9,329

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

XATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

		For the Six Months Ended
		March 31,
		2009				2008
Operating activities
Net loss		$	(580	)		$	(2,351	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			1,486				882
Amortization of debt financing costs			125				42
Stock based compensation			793				883
Changes in assets and liabilities, net of impact of acquisition:
Accounts receivable, net			1,709				(1,636	)
Inventories			(1,286	)			1,591
Deferred product costs			(680	)			(484	)
Prepaid expenses and other assets			26				(668	)
Lease equipment receivable			412				110
Accounts payable			707				(1,213	)
Accrued expenses			(1,558	)			(1,220	)
Deferred revenue			133				1,254
Net cash provided by (used in) operating activities			1,287				(2,810	)
Investing activities
Purchase of equipment and leasehold improvements			(516	)			(2,506	)
Purchase of GeoLogic Solutions, Inc., net of cash acquired			—				(16,171	)
Net cash used in investing activities			(516	)			(18,677	)
Financing activities
Borrowings on long-term obligations			18,077				16,224
Payments on long-term obligations			(27,600	)			(89	)
Payments on financing costs			—				(339	)
Proceeds from issuance of preferred stock and warrants			2,925				—
Proceeds from options and warrants exercised			—				52
Net cash (used in) provided by financing activities			(6,598	)			15,848
Decrease in cash and cash equivalents			(5,827	)			(5,639	)
Cash and cash equivalents
Beginning			8,904				13,675
Ending		$	3,077			$	8,036
Supplemental disclosures of cash flow information
Cash payments for interest		$	744			$	251
Supplemental schedule of noncash investing and financing activities
Preferred stock deemed dividends		$	479			$	43
Preferred stock dividends payable		$	66			$	64
Preferred stock dividends paid		$	98			$	94
Issuance of warrants in consideration for financing fees			—			$	535
Issuance of sellers note			—			$	2,000
Issuance of common stock related to purchase of GeoLogic Solutions, Inc.			—			$	300

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Significant Accounting Policies

Presentation

The accompanying unaudited consolidated financial statements were prepared by XATA Corporation (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures made herein are adequate to make the information presented not misleading.

In the opinion of management, the consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the financial condition, results of operations, and cash flows for the periods presented. Results of operations for the periods presented are not necessarily indicative of results to be expected for any other interim period or for the full year. These consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto in its Form 10-K for the year ended September 30, 2008 and Annual Report to Shareholders filed with the SEC.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary GeoLogic Solutions, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

The Company derives its revenue from sales of systems, software and related services. The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition , as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions , and Securities and Exchange Commission Staff Accounting Bulletin (SAB) 104, Revenue Recognition in Financial Statements .

The Company recognizes revenue under SOP 97-2 and SAB 104 when (i) persuasive evidence of an arrangement exists (for example a signed agreement or purchase order), (ii) delivery has occurred, as evidenced by shipping documents or customer acceptance, (iii) the fee is fixed or determinable and payable within twelve months, and (iv) collectability is probable and supported by credit checks or past payment history.

With regard to arrangements involving multiple elements, the Company allocates revenue to the software and services elements based on the fair value of each element with the residual amount allocated to the systems revenue which is recognized upon delivery. The Company’s determination of fair value relating to the software and services elements in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and has determined that it has sufficient VSOE to allocate revenue to the services and software components of its arrangements. The Company sells its services

separately, and has established VSOE on this basis. VSOE for the software component is determined based upon the customer’s annual renewal rates for this element. Accordingly, assuming all other revenue recognition criteria are met, revenue from the software component is recognized ratably over the applicable term.

Agreements that do not meet the requirements described in Emerging Issues Task Force (EITF) 00-03, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware , to allow treatment under SOP 97-2, result in the recognition of all revenue ratably over the term of the agreement.

Allowance for Doubtful Accounts

The Company grants credit to customers in the normal course of business. The majority of the Company’s accounts receivable and investment in sales-type leases receivable are due from companies with fleet trucking operations in a variety of industries. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required, although sales-type leases receivable are secured by a retained security interest in the leased equipment. Accounts receivable are typically due from customers within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivables are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company reserves for these accounts receivable by increasing bad debt expense when they are determined to be uncollectible. Payments subsequently received, or otherwise determined to be collectible, are treated as recoveries that reduce bad debt expense. The balance of the allowance accounts at March 31, 2009 and September 30, 2008 was approximately $0.4 million and $0.3 million, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Basis of Presentation

Certain amounts from the prior year’s financial statements have been reclassified to conform to the current year presentation. These reclassifications resulted from a detail review by management of the operating expenses of the Company and involved moving certain internal salaries and IT related costs from selling, general and administrative expenses and research and development expenses to cost of sales and between operating expense categories. These reclassifications had no effect on net loss to common shareholders or shareholders’ equity. The reclassifications are shown below (in thousands):

		As Previously								As Currently
		Reported				Reclassification				Reported
For the three months ended December 31, 2008:
Cost of goods sold		$	6,688			$	907			$	7,595
Selling, general and administrative expenses			6,931				(1,030	)			5,901
Research and development expenses			1,284				123				1,407
For the three months ended December 31, 2007:
Cost of goods sold		$	4,058			$	347			$	4,405
Selling, general and administrative expenses			3,716				(316	)			3,400
Research and development expenses			1,040				(31	)			1,009
For the three months ended March 31, 2008:
Cost of goods sold		$	6,009			$	500			$	6,509
Selling, general and administrative expenses			5,759				(166	)			5,593
Research and development expenses			1,439				(334	)			1,105

Additionally, during fiscal year 2009, the Company determined that the previous accounting provided on the initial issuance of the Series B, C and D preferred stock did not reflect the value of the beneficial conversion feature as additional paid-in capital. The Company has made an adjustment within the equity section to properly reflect the carrying value of the respective issues of the preferred stock. These reclassifications had no effect on net loss to common shareholders.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments in overnight sweep and money market accounts. Cash and cash equivalents are in excess of Federal Deposit Insurance Corporation insurance limits.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, sales-type lease receivables, accounts payable and debt obligations, approximate fair value.

Inventories

Inventories consist of finished goods which are stated at the lower of cost or market. Cost is determined on the average cost method.

Investment in Sales-Type Leases

As the result of the acquisition of GeoLogic Solutions, Inc. on January 31, 2008, the Company acquired GeoLogic Solutions, Inc.’s investment in sales-type leases. The Company records the investment in sales-type leases at the present value of the future minimum lease payments. There is no guaranteed residual value associated with the leased devices. The receivables generally have terms of five years and are collateralized by a security interest in the related equipment. The Company records subscriber revenue on these leased devices as the ongoing service is provided over the term of the related lease

agreement and recognizes interest income as the lease payments are billed to the customers. Future minimum lease payments to the Company under non-cancelable sales-type leases as of March 31, 2009 are as follows (in thousands):

Years ending September 30,
2009		$	380
2010			296
2011			42
Total minimum lease payments			718
Less: amount representing interest (at 11.71%)			(52	)
Present value of net minimum sales-type lease payments			666
Less: current portion of investment in sales-type leases			(566	)
Investment in sales-type leases, excluding current portion		$	100

Interest income from sales-type leases was approximately $23,000 and $37,000 for the three months ended March 31, 2009 and 2008, respectively, and $53,000 and $37,000 for the six months ended March 31, 2009 and 2008, respectively.

Debt Financing Costs

Debt financing costs are amortized to interest expense over the term of the related financing agreement on a straight-line basis, which approximates the effective interest method. The net carrying value of the debt financing costs is approximately $0.6 million and $0.7 million as of March 31, 2009 and September 30, 2008, respectively.

Equipment and Leasehold Improvements

Purchased equipment and leased equipment under capital leases are stated at cost and depreciated using the straight-line method over estimated useful lives of approximately two to seven years. Leasehold improvements are amortized over the shorter of the remaining lease term at the time of purchase or their estimated useful lives (one to seven years). Depreciation for income tax reporting purposes is computed using accelerated methods.

Equipment and leasehold improvements consist of (in thousands):

		March 31,				September 30,
		2009				2008
Office furniture and equipment		$	4,575			$	4,003
Engineering and manufacturing equipment			900				831
Leasehold improvements			2,348				2,473
			7,823				7,307
Less: accumulated depreciation			(4,021	)			(3,382	)
Equipment and leasehold improvements, net		$	3,802			$	3,925

Depreciation expense was approximately $0.3 million for each of the three months ended March 31, 2009 and 2008, and $0.6 million for each of the six months ended March 31, 2009 and 2008.

Capitalized Software Development Costs

Software development costs incurred after establishing technological feasibility are capitalized in accordance with Statement of Financial Accounting Standards No. 86, (SFAS No. 86), Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed . Capitalized costs are amortized to cost of goods sold beginning when the product is first released for sale to the general public. Amortization is at the greater of the amount computed using the ratio of current gross revenues for the product to the total of current and anticipated future gross revenues or the straight-line method over the estimated economic life of the product (two to five years). As of March 31, 2009 and September 30, 2008 there were no capitalized software development costs.

Software development costs that do not met the capitalization criteria of SFAS No. 86 are charged to research and development expense as incurred.

Long-Lived Assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.

Goodwill and Intangible Assets

As of March 31, 2009, the Company had a goodwill balance of $3.0 million that resulted from the Company’s acquisition of GeoLogic Solutions, Inc. on January 31, 2008. The Company records goodwill when the purchase price of net tangible and intangible assets acquired exceeds their fair value. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company will review goodwill for impairment at least annually, on the first day of the fourth quarter, or more frequently if an event occurs indicating the potential for impairment. Goodwill is not amortized, but instead tested for impairment at the reporting unit level. The Company has one reporting unit. The annual goodwill impairment test is a two-step process. First, the Company determines if the carrying value of its related reporting unit exceeds fair value, which would indicate that goodwill may be impaired. If the Company then determines that goodwill may be impaired, implied fair value of the goodwill is compared to its carrying amount to determine if there is an impairment loss. The Company completed this review in the fourth quarter of fiscal 2008 and concluded that no impairment existed.

Intangible assets are carried at cost less accumulated amortization. The Company amortizes the cost of identified intangible assets on a straight-line basis over their expected economic lives. In accordance with SFAS No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets ,” the Company reviews intangible assets that have finite useful lives when an event occurs indicating the potential for earlier impairment. The Company reviews for impairment using facts or circumstances; either internal or external, indicating that it may not recover the carrying value of the asset. The Company measures impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values. The Company measures fair value under SFAS No. 144, which is generally based on the present value of estimated future cash flows. The Company’s analysis is based on available information and on assumptions and projections it considers to be reasonable and supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on the Company’s best estimate of projected future cash flows. If necessary, the Company performs subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.

Based on the allocation of the purchase price for GeoLogic Solutions, Inc., intangible assets subject to amortization were as follows as of March 31, 2009 (in thousands):

		Weighted Average								Accumulated
		Life (years)				Cost				Amortization				Net
Acquired customer contracts			8			$	13,500			$	(1,969	)		$	11,531
Other intangibles			7				49				(8	)			41
Total			8			$	13,549			$	(1,977	)		$	11,572

Amortization expense was $0.4 million and $0.3 million for the three months ended March 31, 2009 and 2008, respectively, and $0.8 million and $0.3 million for the six months ended March 31, 2009 and 2008, respectively. Future amortization expense, as of March 31, 2009, is expected to be as follows (in thousands):

Years Ending September 30,
2009		$	847
2010			1,695
2011			1,695
2012			1,695
2013			1,695
Thereafter			3,945
Total expected amortization expense		$	11,572

Product Warranties

The Company sells its systems with a limited warranty, with an option to purchase extended warranties. The Company provides for estimated warranty costs in relation to the recognition of the associated revenue. Factors affecting the Company’s product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per claim. The Company periodically assesses the adequacy of its product warranty liability based on changes in these factors.

At March 31, 2009 and September 30, 2008, the Company had accruals for product warranties of approximately $1.5 million and $1.6 million, respectively. These amounts are included in accrued expenses on the Company’s balance sheet.

Shipping Costs

Shipping costs, which are classified as a component of cost of goods sold, were approximately $0.1 million for each of the three months ended March 31, 2009 and 2008 and $0.2 million for each of the six months ended March 31, 2009 and 2008. Customer billings related to shipping and handling fees are reported as systems revenue.

Advertising Costs

Advertising costs consist primarily of ad campaigns, catalog brochures, promotional items and trade show expenses and are expensed as incurred. Advertising costs, which are included in selling, general and administrative expenses, were approximately $0.2 million and $0.1 million for the three months ended

March 31, 2009 and 2008, respectively, and $0.4 million and $0.2 million for the six months ended March 31, 2009 and 2008, respectively.

Income taxes

The Company accounts for income taxes following the provisions of SFAS No. 109, Accounting for Income Taxes . SFAS No. 109 requires that deferred income taxes be recognized for the future tax consequences associated with differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable earnings. Valuation allowances are established by the Company when necessary to reduce deferred tax assets to the amount more likely than not to be realized. The effect of changes in tax rates is recognized in the period in which the rate change occurs.

Recently Issued Accounting Standards

Fair Value Measurements (SFAS 157)

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements but does not require any new fair value measurements. In February 2008, the Financial Accounting Standards Board issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB No. 157,” which delays the effective date for non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, except for items that are measured at fair value in the financial statements on a recurring basis (at least annually). The adoption of this accounting pronouncement is not expected to have a material effect on the financial statements.

Business Combinations — Revised (SFAS 141R)

In December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business Combinations . SFAS 141(R) replaces SFAS 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141(R) also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective for fiscal years beginning after December 15, 2008. The impact of the adoption of SFAS 141(R) will depend on future acquisitions as there will be no impact on our existing financial position and results of operations.

The Hierarchy of Generally Accepted Accounting Principles (SFAS 162)

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles . SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS No. 162 became effective November 15, 2008. The adoption of SFAS No. 162 has not had a material effect on the Company’s financial position, operating results or cash flows.

Note 2. Revenue and Cost of Goods Sold Information

The Company operates and manages the business as one reportable segment. Factors used to identify the single operating segment include the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance. For the three

and six months ended March 31, 2009 and 2008, the Company reported the following revenues and related cost of goods sold by type.

		Three months ended								Six months ended
		March 31,								March 31,
		2009				2008				2009				2008
Revenue:
Software		$	8,412			$	5,783			$	16,465			$	8,760
Systems			6,857				5,561				12,410				9,348
Services			1,626				785				2,663				1,708
Total revenue		$	16,895			$	12,129			$	31,538			$	19,816

		Three months ended								Six months ended
		March 31,								March 31,
		2009				2008				2009				2008
Cost of goods sold:
Software		$	2,400			$	1,712			$	4,764			$	2,709
Systems			5,822				4,096				10,255				6,832
Services			1,041				701				1,839				1,373
Total cost of goods sold		$	9,263			$	6,509			$	16,858			$	10,914

Note 3. GeoLogic Solutions, Inc. Acquisition

On January 31, 2008, the Company acquired all of the outstanding stock of GeoLogic Solutions, Inc. The results of operations of GeoLogic Solutions, Inc. have been included in the Company’s consolidated results of operations since the date of acquisition. GeoLogic Solutions, Inc. provides mobile communications and tracking systems for the transportation industry. The acquisition enhanced the Company’s product portfolio and broadened its addressable market.

The total purchase price included $15.3 million in cash, 90,689 shares of common stock (valued at $0.3 million) of the Company and $1.8 million in debt obligations to the seller of GeoLogic Solutions, Inc. The Company also incurred $1.6 million of transaction costs in connection with the acquisition. The Company incurred additional debt of $16.2 million in connection with the acquisition.

The components of the purchase price and the allocation to the assets and liabilities based on their estimated fair values at the date of acquisition are as follows (in thousands):

Cash							15,277
Debt obligations							1,750
Common stock							300
Transaction costs							1,560
Total purchase price						$	18,887
Cash		$	557
Other current assets			6,208
Property and equipment			554
Intangible and other assets			1,049
Current liabilities			(5,992	)
Net assets							2,376
Acquired customer contracts							13,500
Goodwill							3,011
Total						$	18,887

Unaudited pro forma results of operations for the three and six months ended March 31, 2008, as if the purchase had occurred at the beginning of the periods indicated are as follows (in thousands, except per share amounts):

		For the Three Months				For the Six Months
		Ended March 31, 2008				Ended March 31, 2008
Revenue		$	13,795			$	26,769
Net loss to common shareholders		$	(2,840	)		$	(6,340	)
Net loss per common share — basic and diluted		$	(0.34	)		$	(0.76	)
Weighted average common and common share equivalents — basic and diluted			8,397				8,325

Pro forma adjustments relate to amortization of intangible assets, interest expense resulting from acquisition financing and certain other adjustments. The above unaudited pro forma consolidated results of operations are for comparative purposes only and are not necessarily indicative of results that would have occurred had the acquisition been consummated as of the beginning of the periods presented, nor are they necessarily indicative of future results.

Note 4. Stock-Based Compensation

In February 2007 the Company adopted the 2007 Long Term Incentive and Stock Option Plan (the 2007 Plan). The 2007 Plan permits the granting of “incentive stock options” meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified options that do not meet the requirements of Section 422. Stock appreciation rights, restricted stock awards, and restricted stock units may also be granted under the 2007 Plan. A total of 500,000 shares of the Company’s common stock were originally reserved for issuance pursuant to equity awards under the 2007 Plan. Subsequently, 1,000,000 shares were approved for addition to the 2007 Plan at the 2009 Annual Shareholders Meeting.

The 2007 Plan has an evergreen provision in which the maximum number of shares that may be issued under the 2007 Plan shall be cumulatively increased on January 1, 2008 and on each January 1 thereafter for nine years by the lesser of (i) 500,000 Common Shares, (ii) 3% of the Company’s outstanding Common Shares, on an as-converted basis, as of the preceding December 31 and (iii) a number of Common Shares determined by the Board or Committee. The Company has 582,375 shares authorized and available for future equity awards as of March 31, 2009. Generally, the options that are granted under the 2007 Plan are exercisable for a period of ten years from the date of grant and vest over a period of up to three years from the date of grant.

Stock Options

The Company accounts for share-based employee compensation plans under the provisions of Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values.

The fair value of each option is estimated at the grant date using the Black-Scholes option-pricing model. The weighted average fair value at the date of grant and the assumptions used to determine such values are indicated in the following table (number of shares in thousands):

		For the Three Months Ended								For the Six Months Ended
		March 31,								March 31,
		2009				2008				2009				2008
Number of shares granted			659				275				725				296
Fair value		$	0.85			$	0.80			$	0.86			$	0.80
Risk-free interest rate			2.30	%			2.12	%			2.28	%			2.22	%
Expected volatility			41.24	%			31.13	%			40.26	%			30.97	%
Expected life (in years)			5.95				3.70				5.73				3.70
Dividend yield			—				—				—				—

The Company estimates the volatility of the common stock at the date of grant based on a historical volatility rate, consistent with SFAS 123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB 107). The decision to use historical volatility was based upon the lack of traded common stock options. The expected term is estimated consistent with the simplified method identified in SAB 107, whose use was extended by Securities and Exchange Commission Staff Accounting Bulletin No. 110 (SAB 110). The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the options. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest. The fair value of stock options are amortized over the vesting period of the awards utilizing a straight-line method.

The following table summarizes information relating to stock option activity for fiscal 2008 and for the six month period ended March 31, 2009 (number of shares in thousands):

						Weighted
						Average
		Shares				Exercise Price
Options outstanding at September 30, 2007			1,232			$	5.01
Granted			323				3.05
Exercised			(15	)			2.98
Cancelled			(301	)			4.43
Options outstanding at September 30, 2008			1,239				4.66
Granted			725				2.17
Cancelled			(49	)			4.20
Options outstanding at March 31, 2009			1,915				3.73

There were no options exercised during the three and six months ended March 31, 2009. Total intrinsic value of stock options exercised during the three and six months ended March 31, 2008 was $2,000. The intrinsic value of stock options outstanding and stock options outstanding and exercisable as of March 31, 2009 was $231,000 and $11,000, respectively.

On December 19, 2008, pursuant to and in accordance with the recommendation of the Compensation Committee (the “Committee”) of the Board of Directors of the Company, the Company extended the expiration date of all employee stock options previously issued under the 2007 Long-Term Incentive and Stock Option Plan and the 2002 Long-Term Incentive and Stock Option Plan from five years to ten years. No changes were made to any other terms of the stock options and the exercise prices remained the same. The total impact of this modification is that an additional $80,000 of compensation cost is being recognized ratably over the remaining vesting periods of the modified options.

Information regarding options outstanding and exercisable at March 31, 2009 is as follows (number of shares in thousands):

		Options Outstanding												Options Exercisable
						Weighted												Weighted
						Average				Weighted								Average				Weighted
						Remaining				Average								Remaining				Average
Range of		Number				Contractual				Exercise				Number				Contractual				Exercise
exercise price		of Shares				Life (Years)				Price				of Shares				Life (Years)				Price
$2.00 - $2.99			889				9.6			$	2.26				123				9.1			$	2.75
$3.15 - $3.99			124				9.2				3.63				15				8.7				3.51
$4.33 - $4.98			45				7.5				4.57				28				7.4				4.72
$5.03 - $5.40			857				7.5				5.23				651				7.4				5.24
			1,915				8.6				3.73				817				7.7				4.81

As of March 31, 2009, there was approximately $1.1 million of total unrecognized compensation costs related to stock option awards. The Company will recognize this cost over the remaining vesting periods of these options. The weighted average period over which the costs will be recognized is 1.4 years.

Restricted Stock Awards

The Company grants restricted shares of common stock in addition to stock options and restricted stock units as part of its long-term incentive compensation to employees. The fair value of restricted stock awards is determined based on the closing market price of the Company’s stock on the date of grant. Restricted stock awards vests over a period of one to six years for employees and vests immediately for directors. Shares granted may be sold once vested.

The following table summarizes information relating to restricted stock activity for fiscal 2008 and for the six month period ended March 31, 2009 (number of shares in thousands):

						Weighted
		Number of				Average Grant
		Shares				Date Fair Value
Restricted stock outstanding at September 30, 2007			361			$	5.22
Granted			151				3.04
Vested			(198	)			4.94
Cancelled			(29	)			4.08
Restricted stock outstanding at September 30, 2008			285				4.37
Granted			48				3.24
Vested			(118	)			4.16
Cancelled			(2	)			2.99
Restricted stock outstanding at March 31, 2009			213				4.25

The total fair value of shares vested during the three months ended March 31, 2009 and 2008 was $0.2 million for each of the three month periods. The total fair value of shares vested during the six months ended March 31, 2009 and 2008 was $0.3 million and $0.6 million, respectively. The weighted average grant date fair value of restricted stock awards granted during the three months ended March 31, 2009 and 2008, respectively, was $2.00 and $3.00. The weighted average grant date fair value of restricted stock awards granted during the six months ended March 31, 2009 and 2008, respectively, was $3.24 and $3.00.

At March 31, 2009, there was approximately $0.7 million of total unrecognized compensation costs related to restricted stock awards. The Company will recognize this cost over the remaining vesting periods of these awards. The weighted average period over which the costs will be recognized is 1.3 years.

Restricted Stock Units

The Company currently grants restricted units of common stock as part of its long-term incentive compensation to employees. The fair value of restricted stock units is determined based on the closing market price of the Company’s stock on the date of grant. Restricted stock units vest over a period of three years for employees.

The following table summarizes information relating to restricted stock unit activity for the six month period ended March 31, 2009 (number of units in thousands):

						Weighted
		Number of				Average Grant
		Shares				Date Fair Value
Restricted stock outstanding at September 30, 2008			—				—
Granted			241			$	2.00
Restricted stock outstanding at March 31, 2009			241				2.00

At March 31, 2009, there was approximately $0.5 million of total unrecognized compensation costs related to restricted stock units. The Company will recognize this cost over the remaining vesting periods of these units. The weighted average period over which the costs will be recognized is 1.9 years.

Note 5. Commitments

Leases

The Company leases its offices, warehouse, and certain office equipment under noncancelable operating leases. The facility leases require that the Company pay a portion of the real estate taxes, maintenance, utilities and insurance.

Approximate future minimum rental commitments, excluding common area costs under these non-cancelable operating leases, as of March 31, 2009 are (in thousands):

Years ending September 30,
2009		$	539
2010			1,086
2011			748
2012			527
2013			540
Thereafter			698
Total		$	4,138

Rental expense, including common area costs, was approximately $0.4 million and $0.3 million for the three months ended March 31, 2009 and 2008, respectively, and $0.8 million and $0.5 million for the six months ended March 31, 2009 and 2008, respectively.

401(k) Plan

The Company has a 401(k) plan covering substantially all employees and the plan is operated on a calendar year basis. The Company provides an employer matching contribution equal to 50% of an employee’s contribution for employee deferrals of up to 6% of their compensation. Matching contributions were $89,000 and $68,000 for the three months ended March 31, 2009 and 2008 and $172,000 and $108,000 for the six months ended March 31, 2009 and 2008, respectively.

Note 6. Financing Arrangements

In connection with the financing of the acquisition of GeoLogic Solutions, Inc., the Company entered into a three-year secured credit facility with Silicon Valley Bank (“SVB”) consisting of a $10.0 million revolving line of credit bearing interest at a floating rate equal to 0.5% over SVB’s Prime Rate. The

credit facility is secured by substantially all the assets of the Company. Interest is paid monthly in arrears, and the entire amount of any outstanding principal is due at maturity on January 30, 2011. The credit agreement contains certain financial covenants which impose a minimum level of net worth and fixed charge coverage ratio.

Also in connection with the acquisition of GeoLogic Solutions, Inc., the Company entered into a four year secured credit facility consisting of an $8.0 million term loan with Partner’s for Growth II, L.P. (“PFG”) bearing interest at a fixed rate of 14.5%, subject to adjustment under various circumstances. Under the terms of the loan agreement, the Company must comply with financial covenants specifying minimum levels of net worth and fixed charge coverage ratio. The loan is secured by substantially all the assets of the Company and is subordinate to the security interest of SVB. Interest is payable monthly, and the Company is required to make quarterly principal payments of $1.0 million beginning March 31, 2011 with the remainder of the unpaid principal due at maturity on January 31, 2012.

As of March 31, 2009, the Company is in compliance with all financial covenants related to the debt obligations.

In addition to the preceding sources of financing, the Company also issued $1.8 million of debt obligations to the seller (the “Seller Notes”) in conjunction with the acquisition of GeoLogic Solutions, Inc. The Seller Notes and related accrued interest were paid in full in February 2009.

Long- term obligations and notes payable consist of the following (in thousands):

		March 31, 2009				September 30, 2008
Subordinated notes		$	—			$	1,225
Subordinated convertible notes			—				525
Total notes payable			—				1,750
Senior secured revolving credit facility			500				8,223
Secured term loan			8,000				8,000
Capitalized leases			164				214
Total long-term obligations			8,664				18,187
Less current portion of long-term obligations			93				1,845
Total long-term obligations, net of current portion		$	8,571			$	16,342

Note 7. Shareholders’ Equity

Common Stock

The Company is authorized to issue up to 25,000,000 shares of common stock.

Preferred Stock

The Company has authorized an undesignated class of preferred stock of 10,000,000 shares. The Board of Directors can issue preferred stock in one or more series and fix the terms of such stock without shareholder approval. Preferred stock may include the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions.

Series B

In December 2003, the Company sold 1,613,000 shares of Series B Preferred Stock for $4.1 million, or $2.54 per share. Each share of the Series B Preferred Stock is convertible into one share of the Company’s common stock. The price per share of the Series B Preferred Stock and the conversion price for the common stock were equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series B Preferred Stock pays a cumulative dividend of 4% of the original issue price per annum (payable semi-annually) on each outstanding share of Series B Preferred Stock. The dividend is payable in additional shares of Series B Preferred Stock rather than cash, at the option of the holders, and has a non-participating preferred liquidation right equal to the original issue price plus accrued unpaid dividends.

For the six months ended March 31, 2009 and 2008, the Company issued 38,000 and 37,000 shares, respectively, of Series B Preferred Stock for payment of accrued dividends. Based on the market value of the Company’s common stock on the date of the dividend payment, the payment of the dividend in additional shares of Series B Preferred Stock resulted in a non-cash dividend of $0.1 million for each of the six months ended March 31, 2009 and 2008, respectively.

The Series B Preferred Stock is redeemable at the option of the holder at 100% of the original purchase price plus accrued and unpaid dividends at any time after five years from the date of issuance, or at any time if there is a significant adverse judgment against the Company, the Company defaults on its debts or files for bankruptcy, or in the event of a change of control. The Company may decline to redeem any or all of the Series B Preferred Stock at its sole option and discretion, and in such case the annual dividend on the Series B Preferred Stock will increase from 4% to 10%. The Company may redeem the Series B Preferred Stock at its option after five years from the date of issuance at the original issue price, plus accrued unpaid dividends, if the market value of the common stock is at least three times the then effective conversion price for a specified period.

Series C

In September 2005, the Company sold 1,269,000 shares of Series C Preferred Stock for $5.0 million, or $3.94 per share. Each share of the Series C Preferred Stock is convertible into one share of the Company’s common stock. The price per share of Series C Preferred Stock and the conversion price for the common stock is equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series C Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in the Certificate of Designation of the Series C Preferred Stock). In that case, the Series C Preferred Stock pays a cumulative dividend of 4% of the original issue price per annum on each outstanding share of Series C Preferred Stock (payable in cash). The Series C Preferred Stock has a non-participating liquidation right equal to the original issue price, plus accrued unpaid dividends which are senior to the Company’s common stock and junior to the Series B Preferred Stock. The Company may redeem the Series C Preferred Stock at its option after five years from the date of issuance at the original issue price, plus accrued unpaid dividends, if the market value of the common stock is at least three times the then effective conversion price for a specified period.

Series D

In June 2007, the Company sold 1,567,000 shares of Series D Preferred Stock for $6.0 million, or $3.83 per share. Each share of the Series D Preferred Stock is convertible into one share of the Company’s common stock. The price per share of Series D Preferred Stock and the conversion price for the common

stock is equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series D Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in the Certificate of Designation of the Series D Preferred Stock). In that case, the Series D Preferred Stock pays a cumulative dividend of 4% of the original issue price per annum on each outstanding share of Series D Preferred Stock (payable in cash). The Series D Preferred Stock has a non-participating liquidation right equal to the original issue price, plus accrued unpaid dividends which are senior to the Company’s common stock and junior to the Series B and Series C Preferred Stock. The Company may redeem the Series D Preferred Stock at its option after five years from the date of issuance at the original issue price, plus accrued unpaid dividends, if the market value of the common stock is at least three times the then effective conversion price for a specified period.

Series E

In February 2009, the Company sold 1,355,857 shares of Series E Preferred Stock for $3.0 million, or $2.22 per share. Each share of the Series E Preferred Stock is convertible into one share of the Company’s common stock. The price per share of Series E Preferred Stock and the conversion price for the common stock is equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series E Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in the Certificate of Designation of the Series E Preferred Stock). In that case, the Series E Preferred Stock pays a cumulative dividend of 4% of the original issue price per annum on each outstanding share of Series E Preferred Stock (payable in cash). The Series E Preferred Stock has a non-participating liquidation right equal to the original issue price, plus accrued unpaid dividends which are senior to the Company’s common stock and junior to the Series B, Series C, and Series D Preferred Stock. The Company may redeem the Series E Preferred Stock at its option after five years from the date of issuance at the original issue price, plus accrued unpaid dividends, if the market value of the common stock is at least three times the then effective conversion price for a specified period.

Additionally, the Company issued 7-year warrants to purchase 406,759 shares of its common stock at an exercise price of $2.22 per share. Also in connection with the Series E Preferred Stock, the Company extended by two years the term of each common stock warrant issued on September 15, 2005 (in connection with the purchase of the Company’s Series C Preferred Stock) and June 19, 2007 (in connection with the purchase of the Company’s Series D Preferred Stock), so that such warrants are now exercisable until the seventh anniversary (instead of the fifth anniversary) of the original date of issuance. The aggregate fair value of the warrants was $535,000, of which $129,000 related to the modification of the Series C and Series D warrants. The warrants permit “cashless exercise.”

In connection with this transaction, the Company recognized a one-time, non-cash deemed dividend of $484,000 relating to the beneficial conversion portion of the preferred stock. The beneficial conversion portion was determined by allocating the proceeds on a fair value basis between the preferred stock and the warrants. The amount of the deemed dividend was the difference between the deemed fair value of the Series E Preferred Stock and the purchase price on the date of the transaction. The deemed dividend was recorded as an addition to preferred stock with a corresponding increase to accumulated deficit. The addition was recognized at the date of issuance of the preferred stock, the same date at which the shares were eligible for conversion.

No broker or placement agent was involved in the placement of the Series E Preferred Stock and no commissions or other compensation was paid.

As part of the execution and closing of the Series E Preferred Stock purchase, the Company and the purchasers also entered into an Exchange Agreement under which the Company was obligated to exchange all shares of the Series E Preferred Stock for an equal number of shares of a new series of preferred stock of the Company (the “Series F Preferred Stock”). The Series F Preferred Stock is identical to the Series E Preferred Stock in all respects, except that its liquidation preference is senior to the Company’s existing series of preferred stock, whereas the Series E Preferred Stock’s liquidation preference was junior to the existing series of Preferred Stock. The Series F Preferred Stock was created, and then exchanged with the Series E Preferred Stock, only after the Company’s shareholders approved amendments to the Company’s Articles of Incorporation that were necessary to allow for the Series F Preferred Stock to have a liquidation preference senior to the Company’s existing series of preferred stock. This approval occurred at the Special Shareholder’s Meeting on April 14, 2009. On April 15, 2009 the Company received assignment of all shares of Series E Preferred Stock from the purchasers and delivered to the purchasers and equal number of shares of Series F Preferred Stock. No Series E Preferred Stock remains outstanding after April 15, 2009.

Common Stock Warrants

The Company has issued warrants for the purchase of common stock to directors, executives, consultants and placement agents. Compensation expense associated with the warrants has not been material. The Company has also issued warrants as a component of preferred stock offerings and debt financing.

The following tables summarize information relating to stock warrants for the fiscal 2008 and the six months ended March 31, 2009 (number of warrants in thousands):

										Weighted
						Weighted				Average
		Number of				Average				Remaining
		Warrants				Exercise Price				Life (years)
Warrants outstanding at September 30, 2007			1,538			$	5.22				2.9
Granted			457
Warrants outstanding at September 30, 2008			1,995				3.54				2.6
Granted			407
Cancelled			(451	)
Warrants outstanding at March 31, 2009			1,951				3.35				4.3

Note 8. Net Loss Per Common Share

Basic loss per common share is computed based on the weighted average number of common shares outstanding by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period. Generally, diluted net income per common share reflects the potential dilution that could occur if securities or other obligations to issue common stock such as options, restricted stock units, warrants or convertible preferred stock, were exercised or converted into common stock that then shared in the earnings of the Company. However, diluted net loss per common share is equal to basic net loss per common share for all periods presented because the effect of including such securities or obligations would have been antidilutive.

Options, restricted stock units, and warrants to purchase a total of 4,106,728 and 3,350,786 shares of common stock, at a weighted-average exercise price of $3.33 and $4.33 were excluded for the three and six months ended March 31, 2009 and 2008, respectively, due to the Company incurring a net loss to common shareholders during these periods. The inclusion of these outstanding options, restricted stock

units, and warrants would have an antidilutive effect. Therefore, basic and diluted net loss per common share amounts are the same for the three and six months ended March 31, 2009 and 2008.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

Except for the historical information contained herein, the matters discussed in this Report on Form 10-Q are forward-looking statements involving risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Numerous factors, risks and uncertainties affect the Company’s operating results and could cause the Company’s actual results to differ materially from forecasts and estimates or from any other forward-looking statements made by, or on behalf of, the Company, and there can be no assurance that future results will meet expectations, estimates or projections. Risks and uncertainties about us include, but are not limited to, the following:

	•		although we have generated operating income and net income recently, operating losses may occur in the future and may be in excess of amounts that could be funded from operations and thus we may be dependent upon external investment to support our operations during these periods;
	•		we will continue to be dependent upon positioning systems and communication networks owned and controlled by others, and accordingly, their problems may adversely impact us;
	•		for the foreseeable future, we are dependent upon the continued receipt and fulfillment of new orders for our current products;
	•		our growth and profitability depend on our timely introduction and market acceptance of new products, our ability to continue to fund research and development activities, and our ability to establish and maintain strategic partner relationships.

Further information regarding these and other risks is included in “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2008, in this Form 10-Q and in our other filings we make with the SEC.

Overview

XATA is one of the leading providers of fleet management solutions to the truck transportation industry. Our innovative technologies and value-added services are intended to enable customers to optimize the utilization of their assets and enhance the productivity of fleet operations across the entire supply chain, resulting in decreased costs, improved compliance with U.S. Department of Transportation (DOT) regulations, and enhanced customer service.

Over the past two decades, XATA has developed relationships with several of the nation’s largest fleets including CVS Pharmacy, Sysco, US Foodservice, Dean Foods, and Southeastern Freight Lines to find and develop technologies that provide information about their fleets and transform that data into actionable intelligence.

On January 31, 2008, XATA completed its acquisition of GeoLogic Solutions, Inc., which provides the commercial trucking industry with wireless asset management solutions in the for- hire segment of the over-the-road transportation sector. As the result of this acquisition, XATA now serves both the private fleet and for-hire segments.

XATA pioneered innovations, such as learned standards and paperless driver logs. We engineer software that improves overall transportation operations and integrates fleet data with back-office billing, payroll and routing systems.

Technology, People, Processes

XATA takes a three-prong approach to meeting its customer’s fleet management needs:

	•		Technology. XATA provides a total fleet management solution, including systems, software and services. XATANET, our web-based, on-demand scalable software, includes a variety of web-based enterprise applications. As our flagship product, XATANET provides critical real-time information about our customers’ fleets, allows for paperless driver logs and provides summary and granular reports on driver and vehicle performance. XATANET can also integrate with back-office applications, for a seamless flow of information, and our software works with a variety of in-cab communications devices.
			MobileMax helps for-hire trucking companies track and manage nearly every aspect of their fleets’ activities to help control costs and increase return on investment. The MobileMax solution features Multi-Mode communication capabilities that automatically switch between land-based and satellite communications to take advantage of the cost-savings and reliability of both terrestrial and satellite communication. MobileMax integrates with dispatching and routing applications for a seamless flow of information.
	•		People. Several XATA employees have been with our company for many years, providing a thorough understanding of the trucking industry. With employee expertise in safety, fleet management and technology, XATA is able to provide consultation services to help organizations implement best practices for fleet productivity and develop specific customer hardware and reporting requirements.
	•		Processes. All XATA processes are designed to make managing fleets easier. Drawing on hundreds of successful implementations with a wide variety of fleets including multibillion-dollar organizations, XATA carefully plans each phase of the implementation and follows well established methodologies. The process begins with assessing our customers’ objectives. Then, we develop a detailed implementation schedule that includes all aspects of the project, from implementation to conversion, integration, training and problem solving.

Critical Accounting Policies

Accounting policies, methods and estimates are an integral part of our financial statements and are based upon management’s current judgments. Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements. Note 1 of the Notes to Financial Statements includes a summary of the significant accounting policies and methods we use. The following is a discussion of what we believe to be the most critical of these policies and methods.

Revenue Recognition. The Company derives its revenue from sales of systems, software and related services, and from application service contracts. The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition , as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions , and Securities and Exchange Commission Staff Accounting Bulletin (SAB) 104, Revenue Recognition in Financial Statements .

Software revenue is recognized under SOP 97-2 and SAB 104 when (i) persuasive evidence of an arrangement exists (for example a signed agreement or purchase order), (ii) delivery has occurred, as evidenced by shipping documents or customer acceptance, (iii) the fee is fixed or determinable and payable within twelve months, and (iv) collectability is probable and supported by credit checks or past payment history.

With regard to software arrangements involving multiple elements, the Company allocates revenue to the software and services elements based on the relative fair value of each element with the residual amount allocated to the systems revenue which is recognized upon delivery. The Company’s determination of fair value relating to the software and services elements in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and has determined that it has sufficient VSOE to allocate revenue to the services and software components of its license arrangements. The Company sells its services separately, and has established VSOE on this basis. VSOE for the software component is determined based upon the customer’s annual renewal rates for this element. Accordingly, assuming all other revenue recognition criteria are met, revenue from the software component is recognized ratably over the applicable term.

Agreements that do not meet the requirements described in Emerging Issues Task Force (EITF) 00-03, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware , to allow treatment under SOP 97-2, result in the recognition of all revenue ratably over the term of the agreement.

Allowance for doubtful accounts. We grant credit to customers in the normal course of business. The majority of the Company’s accounts receivable and investment in sales-type leases receivable are due from companies with fleet trucking operations in a variety of industries. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required, although sales-type leases receivable are secured by a retained security interest in the leased equipment. Accounts receivable are typically due from customers within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. We determine the allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivables are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. We reserve for these accounts receivable by increasing bad debt expense when they are determined to be uncollectible. Payments subsequently received, or otherwise determined to be collectible, are treated as recoveries that reduce bad debt expense.

Goodwill. As of March 31, 2009, the Company had a goodwill balance of $3.0 million that resulted from the Company’s acquisition of GeoLogic Solutions, Inc. on January 31, 2008. The Company records goodwill when the purchase price of net tangible and intangible assets acquired exceeds their fair value. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company will review goodwill for impairment at least annually, on the first day of the fourth quarter, or more frequently if an event occurs indicating the potential for impairment. Goodwill is not amortized, but instead tested for impairment at the reporting unit level. The Company has one reporting unit. The annual goodwill impairment test is a two-step process. First, the Company determines if the carrying value of its related reporting unit exceeds fair value, which would indicate that goodwill may be impaired. If the Company then determines that goodwill may be impaired, implied fair value of the goodwill is compared to its carrying amount to determine if there is an impairment loss. The Company completed this review in the fourth quarter of fiscal 2008 and concluded that no impairment existed.

Intangible assets are carried at cost less accumulated amortization. The Company amortizes the cost of identified intangible assets on a straight-line basis over their expected economic lives. In accordance with SFAS No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets ,” the Company reviews intangible assets that have finite useful lives when an event occurs indicating the potential for earlier impairment. The Company reviews for impairment using facts or circumstances; either internal or external, indicating that it may not recover the carrying value of the asset. The Company measures impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values. The Company measures fair value under SFAS No. 144, which is generally based on the present value of estimated future cash flows. The Company’s analysis is based on available information and on assumptions and projections it considers to be reasonable and supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on the Company’s best estimate of projected future cash flows. If necessary, the Company performs subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.

Product Warranties. The Company sells its systems with a limited warranty, with an option to purchase extended warranties. The Company provides for estimated warranty costs in relation to the recognition of the associated revenue. Factors affecting the Company’s product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per claim. The Company periodically assesses the adequacy of its product warranty liability based on changes in these factors. At March 31, 2009 and September 30, 2008, the Company had accruals for product warranties of approximately $1.5 million and $1.6 million, respectively. These amounts are included in accrued expenses on the Company’s balance sheet.

Capitalized software development costs . Software development costs incurred after establishing technological feasibility are capitalized in accordance with Statement of Financial Accounting Standards No. 86, (SFAS No. 86), Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed . Capitalized costs are amortized to cost of goods sold beginning when the product is first released for sale to the general public. Amortization is at the greater of the amount computed using the ratio of current gross revenues for the product to the total of current and anticipated future gross revenues or the straight-line method over the estimated economic life of the product (two to five years). As of March 31, 2009 and September 30, 2008 there were no capitalized development costs. Research and development expenses are charged to expense as incurred. Such expenses include software development costs which have not met the capitalization criteria of SFAS No. 86.

Income taxes . Deferred income taxes are provided for using the liability method whereby deferred tax assets and deferred tax liabilities are recognized for the effects of taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

On October 1, 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 requires application of a “more-likely-than-not” threshold to the recognition and derecognition of uncertain tax positions. Under FIN 48, once the-more-likely-than-not threshold is met, the amount of benefit to be recognized is the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such a change. The impact of adopting FIN 48 on the Company’s consolidated financial statements was not material and no cumulative effect adjustment was recorded to

the October 1, 2007 balance of accumulated deficit. In 2008, the Company recognized no tax benefit or liabilities for uncertainties related to prior and current year income tax positions, which were determined to be immaterial.

Results of Operations for the three and six months ended March 31, 2009 and 2008

The following table sets forth detail related to revenue, cost of goods sold, and gross margins:

		Three months ended March 31,								Six months ended March 31,
		2009				2008				2009				2008
Software
Revenue		$	8,412			$	5,783			$	16,465			$	8,760
Cost of goods sold			2,400				1,712				4,764				2,709
Gross margin		$	6,012			$	4,071			$	11,701			$	6,051
Gross margin %			71.5	%			70.4	%			71.1	%			69.1	%
Systems
Revenue		$	6,857			$	5,561			$	12,410			$	9,348
Cost of goods sold			5,822				4,096				10,255				6,832
Gross margin		$	1,035			$	1,465			$	2,155			$	2,516
Gross margin %			15.1	%			26.3	%			17.4	%			26.9	%
Services
Revenue		$	1,626			$	785			$	2,663			$	1,708
Cost of goods sold			1,041				701				1,839				1,373
Gross margin		$	585			$	84			$	824			$	335
Gross margin %			36.0	%			10.7	%			30.9	%			19.6	%
Total
Revenue		$	16,895			$	12,129			$	31,538			$	19,816
Cost of goods sold			9,263				6,509				16,858				10,914
Gross margin		$	7,632			$	5,620			$	14,680			$	8,902
Gross margin %			45.2	%			46.3	%			46.5	%			44.9	%

Revenue

Overall revenue increased 39 percent to $16.9 million for the three months ended March 31, 2009 compared to $12.1 million for the same period in fiscal 2008. Overall revenue increased 59 percent to $31.5 million for the six months ended March 31, 2009 compared to $19.8 million for the same period in fiscal 2008. Total revenues acquired with GeoLogic Solutions, Inc. were $4.6 million and $9.0 million for the three and six months ended March 31, 2009, respectively, and $3.2 million for the two month period from the date of acquisition to March 31, 2008. The organic revenue growth, which includes Geologic Solutions, Inc. revenue for the two month period from the date of acquisition to March 31, 2008 and the comparable period in fiscal 2009, was 26 percent and 28 percent for the three and six months ended March 31, 2009, respectively.