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 June 30, 2010

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 (§232.405 of this chapter) 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

APPLICABLE ONLY TO CORPORATE ISSUERS

As of July 30, 2010, the following securities of the Registrant were outstanding: 9,814,799 shares of Common Stock, $.01 par value per share, 2,084,557 shares of Series B Preferred Stock, 1,269,036 shares of Series C Preferred Stock, 1,566,580 shares of Series D Preferred Stock, 1,355,857 of Series F Preferred Stock and 10,066,663 shares of Series G Preferred Stock.

 

 

XATA Corporation
Index

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2010 and 2009			3
Consolidated Balance Sheets as of June 30, 2010 and September 30, 2009			4
Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended June 30, 2010 and the Twelve Months Ended September 30, 2009			5
Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation			27
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. Reserved			34
Item 5. Other Information			34
Item 6. Exhibits			34
SIGNATURES
EXHIBITS
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited).

XATA CORPORATION

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

		For the Three Months Ended								For the Nine Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenue		$	17,954			$	17,589			$	53,582			$	49,127
Costs and expenses
Cost of goods sold			8,912				10,085				27,669				26,943
Selling, general and administrative			6,627				5,712				19,702				17,364
Research and development			1,759				1,407				4,692				4,218
Acquisition related costs			—				—				837				—
Total costs and expenses			17,298				17,204				52,900				48,525
Operating income			656				385				682				602
Interest expense on financing activities			—				—				(1,358	)			—
Acquisition related interest and mark to market			(2	)			—				(356	)			—
Net interest and other expense			(28	)			(351	)			(392	)			(1,148	)
Income (loss) before income taxes			626				34				(1,424	)			(546	)
Income tax expense			—				—				—				—
Net income (loss)			626				34				(1,424	)			(546	)
Preferred stock dividends			(52	)			(50	)			(155	)			(149	)
Preferred stock deemed dividends			(23	)			(46	)			(1,691	)			(525	)
Net income (loss) to common shareholders		$	551			$	(62	)		$	(3,270	)		$	(1,220	)
Net income (loss) per common share:
Basic		$	0.06			$	(0.01	)		$	(0.36	)		$	(0.14	)
Diluted		$	0.02			$	(0.01	)		$	(0.36	)		$	(0.14	)
Weighted average common and common share equivalents:
Basic			9,718				8,588				9,170				8,530
Diluted			26,359				8,588				9,170				8,530

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

XATA CORPORATION

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

		June 30,				September 30,
		2010				2009
ASSETS
Current assets
Cash and cash equivalents		$	15,551			$	3,440
Accounts receivable, less allowances of $544 at June 30, 2010 and $368 at September 30, 2009			10,044				9,323
Inventories			2,538				4,104
Deferred product costs			2,161				2,060
Prepaid expenses and other current assets			740				1,064
Total current assets			31,034				19,991
Equipment, leased equipment and leasehold improvements, net			5,487				3,980
Intangible assets, net			15,474				10,725
Goodwill			15,459				3,011
Deferred product costs, net of current portion			1,849				2,470
Other assets			275				487
Total assets		$	69,578			$	40,664
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current portion of debt obligations		$	852			$	84
Accounts payable			5,753				5,366
Accrued expenses			4,927				5,914
Deferred revenue			4,902				5,280
Total current liabilities			16,434				16,644
Debt obligations, net of current portion			397				8,534
Deferred revenue, net of current portion			4,113				6,101
Other long-term liabilities			682				820
Total liabilities			21,626				32,099
Shareholders’ equity
Preferred stock, no par, 50,000 shares authorized:
Series B, 4% convertible, 2,250 shares designated; shares issued and outstanding: 2,085 at June 30, 2010 and 2,004 at September 30, 2009			5,033				4,790
Series C, convertible, 1,400 shares designated; shares issued and outstanding: 1,269 at June 30, 2010 and September 30, 2009			4,426				4,426
Series D, convertible, 1,600 shares designated; shares issued and outstanding: 1,567 at June 30, 2010 and September 30, 2009			5,279				5,279
Series F, convertible, 1,400 shares designated; shares issued and outstanding: 1,356 at June 30, 2010 and September 30, 2009			2,365				2,365
Series G, convertible, 10,100 shares designated; shares issued and outstanding: 10,067 at June 30, 2010			26,877				—
Common stock, par value $0.01 per share; 100,000 shares authorized; shares issued and outstanding: 9,815 at June 30, 2010 and 8,789 at September 30, 2009			98				88
Contingent common stock earn-out			6,452				—
Additional paid-in capital			41,355				32,536
Accumulated deficit			(44,189	)			(40,919	)
Accumulated other comprehensive income			256				—
Total shareholders’ equity			47,952				8,565
Total liabilities and shareholders’ equity		$	69,578			$	40,664

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

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

																																																														Accumulated
		Series B								Series C								Series D								Series F								Series G																Contingent				Additional								Other
		Preferred Stock								Preferred Stock								Preferred Stock								Preferred Stock								Preferred Stock								Common Stock								Common Stock				Paid-In				Accumulated				Comprehensive
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Earn-Out				Capital				Deficit				Income				Total
Balance at September 30, 2008			1,926			$	5,181				1,269			$	4,845				1,567			$	5,937				—			$	—				—			$	—				8,745			$	87			$	—			$	28,234			$	(38,092	)		$	—			$	6,192
Issuance of restricted shares of common stock			—				—				—				—				—				—				—				—				—				—				48				1				—				(1	)			—				—				—
Stock based compensation			—				—				—				—				—				—				—				—				—				—				—				—				—				1,613				—				—				1,613
Forfeiture of restricted shares of common stock			—				—				—				—				—				—				—				—				—				—				(4	)			—				—				—				—				—				—
Issuance of preferred stock and warrants			—				—				—				—				—				—				1,356				2,365				—				—				—				—				—				500				—				—				2,865
Record the beneficial conversion feature			—				—				—				—				—				—				—				(484	)			—				—				—				—				—				484				—				—				—
Preferred stock dividends			78				197				—				—				—				—				—				—				—				—				—				—				—				—				(200	)			—				(3	)
Preferred stock deemed dividends			—				41				—				—				—				—				—				484				—				—				—				—				—				—				(525	)			—				—
Adjustment to reflect value of beneficial conversion feature			—				(629	)			—				(419	)			—				(658	)			—				—				—				—				—				—				—				1,706				—				—				—
Net loss			—				—				—				—				—				—				—				—				—				—				—				—				—				—				(2,102	)			—				(2,102	)
Balance at September 30, 2009			2,004				4,790				1,269				4,426				1,567				5,279				1,356				2,365				—				—				8,789				88				—				32,536				(40,919	)			—				8,565
Stock based compensation			—				—				—				—				—				—				—				—				—				—				—				—				—				1,026				—				—				1,026
Issuance of common stock for share based compensation awards			—				—				—				—				—				—				—				—				—				—				218				2				—				2				—				—				4
Issuance of common stock for acquisition of Turnpike Global Technologies			—				—				—				—				—				—				—				—				—				—				810				8				—				2,422				—				—				2,430
Forfeiture of restricted shares of common stock			—				—				—				—				—				—				—				—				—				—				(2	)			—				—				—				—				—				—
Contingent common stock earn-out			—				—				—				—				—				—				—				—				—				—				—				—				6,452				—				—				—				6,452
Issuance of preferred stock and warrants			—				—				—				—				—				—				—				—				10,067				26,877				—				—				—				3,715				—				—				30,592
Record the beneficial conversion feature			—				—				—				—				—				—				—				—				—				—				—				—				—				1,654				(1,654	)			—				—
Preferred stock dividends			81				206				—				—				—				—				—				—				—				—				—				—				—				—				(155	)			—				51
Preferred stock deemed dividends			—				37				—				—				—				—				—				—				—				—				—				—				—				—				(37	)			—				—
Comprehensive loss:
Foreign currency translation adjustment																																																															256				256
Net loss																																																											(1,424	)							(1,424	)
Total comprehensive loss																																																																			(1,168	)
Balance at June 30, 2010			2,085			$	5,033				1,269			$	4,426				1,567			$	5,279				1,356			$	2,365				10,067			$	26,877				9,815			$	98			$	6,452			$	41,355			$	(44,189	)		$	256			$	47,952

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

XATA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		For the Nine Months Ended
		June 30,
		2010				2009
Operating activities
Net loss		$	(1,424	)		$	(546	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of intangibles			3,707				2,250
Amortization of debt financing costs			458				188
Non-cash interest expense on convertible debt			892				—
Non-cash charges for issuance of equity securities related to the acquisition of Turnpike Global Technologies			357				—
Stock based compensation			1,026				1,195
Changes in assets and liabilities, net of impact of acquisition:
Accounts receivable, net			141				2,290
Inventories			1,566				(1,491	)
Deferred product costs			521				(539	)
Prepaid expenses and other assets			356				690
Accounts payable			(226	)			833
Accrued expenses			(1,634	)			(1,830	)
Deferred revenue			(2,365	)			(731	)
Net cash provided by operating activities			3,375				2,309
Investing activities
Purchase of equipment and leasehold improvements			(2,063	)			(892	)
Acquisition of Turnpike Global Technologies, net of cash acquired			(9,451	)			—
Net cash used in investing activities			(11,514	)			(892	)
Financing activities
Borrowings on long-term obligations, net of costs			29,709				18,077
Payments on long-term obligations			(9,460	)			(27,622	)
Proceeds from issuance of preferred stock and warrants			—				2,865
Proceeds from options exercised			4				—
Net cash provided by (used in) financing activities			20,253				(6,680	)
Effects of exchange rate on cash			(3	)			—
Increase (decrease) in cash and cash equivalents			12,111				(5,263	)
Cash and cash equivalents
Beginning			3,440				8,904
Ending		$	15,551			$	3,641
Supplemental disclosures of cash flow information
Cash payments for interest		$	406			$	883
Supplemental schedule of noncash investing and financing activities
Assets acquired under capital lease obligation		$	161			$	—
Preferred stock deemed dividends		$	1,691			$	525
Preferred stock dividends		$	155			$	17
Preferred stock dividends paid		$	206			$	197
Conversion of debt into Series G preferred stock and warrants		$	30,592			$	—
Contingent common stock earnout related to purchase of Turnpike Global Technologies		$	6,452			$	—
Issuance of common stock related to purchase of Turnpike Global Technologies		$	2,430			$	—

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, 2009 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 subsidiaries Turnpike Global Technologies, Inc. and Turnpike Global Technologies LLC (combined “Turnpike”) and GeoLogic Solutions, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

The Company derives its revenue from sales or rental of hardware, software and related services. The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 985-605 — Software — Revenue Recognition, ASC 605-10 — Revenue Recognition — Overall, and ASC 605-25 — Revenue Recognition — Multiple Element Arrangements . Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.

Software revenue is recognized under ASC 985-605 and ASC 605-10 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 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’s assessment of VSOE for each element is either the price charged when the same element is sold separately or the price established by management if that item is not yet sold separately. The Company has analyzed all of the elements included in its multiple-

element software arrangements and has determined that it has sufficient VSOE to allocate revenue to the services and software components of its arrangements. Accordingly, assuming all other revenue recognition criteria are met, revenue from the software component is recognized ratably over the applicable term.

With regards to arrangements involving multiple-elements that do not give customers the explicit contractual right to take possession of our software at any time during the hosting period, revenue is recognized in accordance with ASC 605-25. Under ASC 605-25, the hardware element must have stand alone value and the monthly service element must have objective and reliable evidence of the fair value. Revenue is allocated based on the fair value of each element as evidenced by vendor specific objective evidence. Such evidence consists primarily of pricing of multiple elements as if sold as separate products or services. When the fair value of any undelivered element included in a multiple-element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and/or services have been performed, or until we can objectively determine the fair value of all remaining undelivered elements.

Agreements that do not meet the requirements described in ASC 985-605 or ASC 605-25, results in the recognition of all revenue ratably over the term of the agreement.

Third-Party Reseller Agreements

The Company has contracted with various resellers in the US and Canada, collectively the “Resellers”, to allow for them to sell the RouteTracker application in combination with their own communication services. The customer contracts directly with the Resellers for the communication services and RouteTracker application. The customer is billed by and remits all payments to the Resellers. The Resellers then remit a set portion of revenues collected that relate to the RouteTracker application to the Company and retains the remainder as their own revenue. In accordance with ASC 605-45 — Revenue Recognition - Principal Agent Considerations , the Company records the revenue received from the resellers net of the amounts retained by the resellers.

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 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 trade 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.

Foreign Currency Translation

The financial statements with a functional currency other than the USD have been translated into USD using the current rate method. Assets and liabilities have been translated using the exchange rates at the balance sheet date. Income and expense amounts have been translated using the average exchange rates

during the period. Translation gains or losses resulting from the changes in exchange rates have been reported as a component of accumulated other comprehensive income in the statements of changes in shareholders’ equity.

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.

Subsequent Events

The Company has evaluated all subsequent events to ensure that this Quarterly Report on Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of June 30, 2010, and events which occurred subsequent to June 30, 2010.

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

Fair Value Hierarchy

ASC 820 — Fair Value Measurement and Disclosures, which the Company adopted for nonfinancial assets and liabilities as of October 1, 2009, establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 — Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following tables set forth by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2010, according to the valuation techniques we used to determine their fair values.

						Fair Value Measurements at Reporting Date Using
		June 30, 2010				Level 1				Level 2				Level 3
Liabilities:
Contingent earn out		$	179			$	—			$	—			$	179
Total		$	179			$	—			$	—			$	179

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, sales-type lease receivables, accounts payable, and capital lease obligations, approximate fair value. The fair value of cash and cash equivalents is approximated using level 1 inputs. The fair value of accounts receivable, sales-type lease receivables, accounts payable, and capital lease obligations is approximated using level 3 inputs.

Inventories

Inventories consist of finished goods which are stated at the lower of cost or market. Cost is determined on the average cost method, which approximates the first-in, first-out method.

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 June 30, 2010 are as follows (in thousands):

Years ending September 30,
2010		$	27
2011			38
Total minimum lease payments			65
Less: amount representing interest (at 11.71%)			(12	)
Present value of net minimum sales-type lease payments (current)			53

Interest income from sales-type leases was approximately $2,000 and $18,000 for the three months ended June 30, 2010 and 2009, respectively. Interest income from sales-type leases was approximately $14,000 and $71,000 for the nine months ended June 30, 2010 and 2009, 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 was approximately $0.5 million as of September 30, 2009. In the first quarter of fiscal 2010, the Company paid the outstanding balance on its $8.0 million term loan and $0.5 million line of credit and charged the remaining unamortized balance of the related debt financing costs of $0.5 million to “Interest expense on financing activities” in the statement of operations.

Equipment, Leased 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):

		June 30,				September 30,
		2010				2009
Office furniture and equipment		$	6,201			$	4,464
Leased equipment			2,352				520
Engineering and manufacturing equipment			915				900
Leasehold improvements			2,435				2,650
			11,903				8,534
Less: accumulated depreciation			(6,416	)			(4,554	)
Equipment and leasehold improvements, net		$	5,487			$	3,980

Total depreciation expense was approximately $0.4 million and $0.3 million for the three months ended June 30, 2010 and 2009, respectively. Total depreciation expense was approximately $1.1 million and $1.0 million for the nine months ended June 30, 2010 and 2009, respectively. Depreciation on leased RouteTracker equipment is recorded as cost of goods sold and was $0.3 million and $0.7 million for the three and nine months ended June 30, 2010, respectively.

Capitalized Software Development Costs

System development costs incurred after establishing technological feasibility are capitalized as capitalized system development costs in accordance with Statement of ASC 985-20 — Software — Costs to Be Sold, Leased, or Otherwise Marketed . Costs that are capitalized 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 June 30, 2010 there was $0.3 million of capitalized development costs. At September 30, 2009 there were no capitalized development costs.

Product development costs that do not meet the capitalization criteria of ASC 985-20 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

As of June 30, 2010, the Company had a goodwill balance of $15.5 million of which $3.0 million resulted from the Company’s acquisition of GeoLogic Solutions, Inc. on January 31, 2008 and $12.5 million resulted from the Company’s preliminary purchase price allocation for its acquisition of Turnpike on December 4, 2009. The Company records goodwill when the purchase price of net tangible and intangible assets acquired exceeds their fair value. In accordance with ASC 350-20 — Intangibles — Goodwill and Others, the Company reviews 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. We have one reporting unit. The annual goodwill impairment test is a two-step process. First, we determine if the carrying value of our related reporting unit exceeds fair value, which would indicate that goodwill may be impaired. If we then determine that goodwill may be impaired, we compare the implied fair value of the goodwill to its carrying amount to determine if there is an impairment loss. The Company’s most recent review was completed in the fourth quarter of fiscal 2009 and concluded that no impairment existed.

The changes in the net carrying amount of goodwill for the nine months ended June 30, 2010 are as follows:

Balance at September 30, 2009		$	3,011
Goodwill from acquisition of Turnpike			12,301
Foreign currency translation adjustment			147
Balance at June 30, 2010		$	15,459

Intangible Assets

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 ASC 360-10 — Property, Plant, and Equipment — Overall, the Company reviews intangible assets that have finite useful lives when an event occurs indicating the potential for earlier impairment. 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 ASC 360-10, which is generally based on the sum of the undiscounted 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.

Intangible assets subject to amortization were as follows as of June 30, 2010 (in thousands):

		Weighted												Foreign Currency
		Average Life								Accumulated				Translation
		(years)				Cost				Amortization				Adjustment				Net
Acquired customer contracts			7.8			$	14,900			$	(4,217	)		$	20			$	10,703
Acquired technology			7.0				2,700				(230	)			38				2,508
Reseller relationships			6.0				1,500				(149	)			21				1,372
Trademark			10.0				900				(54	)			13				859
Other intangibles			7.0				49				(17	)			—				32
Total			7.7			$	20,049			$	(4,667	)		$	92			$	15,474

Amortization expense was $0.7 million and $0.4 million for the three months ended June 30, 2010 and 2009, respectively. Amortization expense was $1.9 million and $1.3 million for the nine months ended June 30, 2010 and 2009, respectively. Future amortization expense, as of June 30, 2010, is expected to be as follows (in thousands):

Years ending September 30,
2010		$	674
2011			2,694
2012			2,694
2013			2,694
2014			2,694
Thereafter			4,024
Total expected amortization expense		$	15,474

Product Warranties

The Company sells its products with a limited warranty. 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 June 30, 2010 and September 30, 2009, the Company had accruals for product warranties of approximately $1.4 million and $1.8 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 June 30, 2010 and 2009 and $0.2 million and $0.3 million for the nine months ended June 30, 2010 and 2009, respectively. 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 $0.3 million and $0.2 million for the three months ended June 30, 2010 and 2009, respectively. Advertising costs were approximately $0.8 million and $0.7 million for the nine months ended June 30, 2010 and 2009, respectively.

Income taxes

The Company accounts for income taxes following the provisions of ASC 740-10 — Income Taxes - Overall . ASC 740-10 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 Measurement and Disclosures (ASU 2010-06)

In January 2010, the FASB published ASU 2010-06 “Fair Value Measurements and Disclosures (Topic 820): — Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 clarifies improved disclosure requirement related to fair value measurements and disclosures — Overall Subtopic (Subtopic 820-10) of the FASB Accounting Standards Codification. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure about purchase, sales, issuances, and settlement in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of this standard did not have an impact on the Company’s financial position and results of operations.

Revenue Recognition (ASU 2009-13 and ASU 2009-14)

In October 2009, the FASB issued the following ASUs: ASU No. 2009-13, Revenue Recognition (ASC Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force and ASU No. 2009-14, Software (ASC Topic 985) — Certain Revenue Arrangements That Include Software Elements, a consensus of the FASB Emerging Issues Task Force.

ASU No. 2009-13: This guidance modifies the fair value requirements of ASC subtopic 605-25 Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” in addition to VSOE and VOE (now referred to as TPE standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted.

ASU No. 2009-14: This guidance modifies the scope of ASC subtopic 965-605 Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products

when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.

These updates require expanded qualitative and quantitative disclosures and are effective for fiscal years beginning on or after June 15, 2010. However, companies may elect to adopt as early as interim periods ended September 30, 2009. These updates may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company is currently evaluating the impact of adopting these updates on our consolidated financial statements.

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 nine months ended June 30, 2010 and 2009, the Company reported the following revenues and related cost of goods sold by type:

		For the Three Months Ended								For the Nine Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenue:
Software		$	11,586			$	8,976			$	33,194			$	25,441
Systems			5,385				6,804				17,176				19,215
Services			983				1,809				3,212				4,471
Total revenue		$	17,954			$	17,589			$	53,582			$	49,127

		For the Three Months Ended								For the Nine Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Cost of goods sold:
Software		$	2,988			$	2,495			$	8,676			$	7,258
Systems			5,004				6,470				16,541				16,725
Services			920				1,120				2,452				2,960
Total cost of goods sold		$	8,912			$	10,085			$	27,669			$	26,943

Software revenue includes monthly subscriptions from XATANET and RouteTracker solutions, and monthly fees from MobileMax and OpCenter product lines. Systems revenue includes hardware, warranty, repair, and activation revenue. Services revenue includes training, implementation, installation, and professional service revenue.

Cost of software consists of communication, hosting costs, and direct personnel costs related to network, infrastructure, and RouteTracker customer support. Cost of systems consists of the direct product costs, warranty costs, product repair costs, and direct personnel costs related to XATANET and MobileMax technical support. Cost of services consists of third party vendor costs and direct costs related to service personnel.

Note 3. Turnpike Global Technologies, Inc. and Turnpike Global Technologies LLC Acquisition

On December 4, 2009, the Company acquired all of the outstanding equity of Turnpike for a purchase price at closing consisting of $10.0 million in cash and 833,333 shares of common stock of the Company. Additionally, the Company committed to pay total earn-outs up to an additional 2,500,000 shares of common stock upon achievement by Turnpike of certain performance goals for 2010, 2011, and 2012 fiscal years. All share related activity required shareholder approval. On February 17, 2010 the Company’s shareholders approved the transaction and common shares totaling 809,993 were issued to the shareholders of Turnpike, with the value of the remaining 23,340 shares being settled in cash of $70,000 to non-accredited U.S. holders. Prior to shareholder approval, the fair value of the common shares and contingent earn out was recorded as long term obligations of the Company with periodic re-measurement of fair value. The imputed interest on the common shares and the mark to market adjustment for the earn-outs has been shown as “Acquisition related interest and mark to market” on the statement of operations.

In connection with financing the acquisition of Turnpike, the Company issued convertible debt totaling $30.2 million. The convertible debt was converted into 10,066,663 shares of Series G preferred stock and warrants to purchase 3,019,995 common shares (with an exercise price of $3.00 per share) on February 19, 2010, subsequent to shareholder approval. The convertible debt carried an interest rate of 14% per annum. The Company used proceeds from the convertible debt for the purchase of Turnpike, payment of transaction costs, pay off of the term loan with Partner’s for Growth II, L.P. (“PFG”) of $8.0 million and to pay a litigation settlement. The remaining proceeds are being utilized for working capital needs and future growth. The interest on the convertible debt while it was outstanding has been included in “Interest expense on financing activities” on the statement of operations.

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

Cash						$	10,000
Common stock of XATA (1)							2,477
Potential earn-out in additional common stock of XATA (2)							6,297
Total purchase price						$	18,774
Cash		$	548
Accounts receivable, less allowances for doubtful accounts			838
Prepaid expenses			4
Equipment and leasehold improvements			1,419
Accounts payable			(609	)
Accrued expenses			(546	)
Capital lease obligations			(1,681	)
Net liabilities							(27	)
Acquired customer contracts and other intangible assets (3)							6,500
Goodwill							12,301
Total						$	18,774

		Fair Value				Est. Useful Life
Acquired customer contracts		$	1,400			6 years
Acquired technology			2,700			7 years
Reseller relationships			1,500			6 years
Trademark			900			10 years
Total intangible assets		$	6,500

The following unaudited pro forma results of operations are presented to illustrate the estimated effects of the Company’s equity raise and acquisition of Turnpike on the Company’s historical results of operations. The pro forma adjustments are based on the preliminary information available at the time of the preparation of this document. The 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.

Unaudited pro forma results of operations for the three months ended June 30, 2009 and the nine months ended June 30, 2010 and 2009, as if the equity raise, debt pay offs, acquisition of Turnpike, shareholder approval, and conversion of the convertible debt and related beneficial conversion all occurred at the beginning of the periods indicated are as follows (in thousands, except per share amounts):

		For the Three				For the Nine Months
		Months Ended June				Ended June 30,
		30, 2009				2010				2009
		(unaudited pro forma)				(unaudited pro forma)
Revenue		$	19,002			$	55,236			$	53,166
Net income (loss) to common shareholders		$	130			$	(2,353	)		$	(2,994	)
Net income (loss) per common share:
Basic		$	0.01			$	(0.25	)		$	(0.32	)
Diluted		$	0.01			$	(0.25	)		$	(0.32	)
Weighted average common and common share equivalents — basic and diluted
Basic			9,421				9,585				9,363
Diluted			26,077				9,585				9,363

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 488,790 shares authorized and available for future equity awards as of June 30, 2010. 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 ASC 718 — Compensation — Stock Compensation, 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 Nine Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Number of shares granted			9				—				468				725
Fair value per share		$	1.41				—			$	1.31			$	0.86
Risk-free interest rate			3.07	%			—				3.06	%			2.28	%
Expected volatility			39.50	%			—				42.35	%			40.26	%
Expected life (in years)			6.00				—				5.94				5.73
Dividend yield			—				—				—				—

The Company estimates the volatility of the common stock at the date of grant based on a historical volatility rate, consistent with ASC 718. 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, as identified in ASC 718-10 — Compensation — Stock Compensation — Overall, for share-based awards granted during fiscal 2010 and 2009. 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 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 2009 and for the nine month period ended June 30, 2010 (number of shares in thousands):

						Weighted
						Average
		Shares				Exercise Price
Options outstanding at September 30, 2008			1,239			$	4.66
Granted			732				2.18
Cancelled:
Expired			(25	)			3.99
Forfeited			(41	)			4.24
Options outstanding at September 30, 2009			1,905				3.73
Granted			468				2.91
Exercised			(2	)			2.00
Cancelled:
Expired			(25	)			5.23
Forfeited			(59	)			2.83
Options outstanding at June 30, 2010			2,287			$	3.57

Total intrinsic value of options exercised during the three and nine months ended June 30, 2010 was $3,000. The intrinsic value of stock options outstanding and stock options outstanding and exercisable as of June 30, 2010 was $0.5 million and $0.2 million, 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 June 30, 2010 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			1,263				8.7			$	2.46				389				8.2			$	2.39
3.00 - 3.99			163				8.5				3.51				82				8.5				3.40
4.33 - 4.98			35				6.2				4.64				35				6.2				4.64
5.03 - 5.40			826				6.4				5.23				826				6.4				5.23
			2,287				7.8				3.57				1,332				7.1				4.27

As of June 30, 2010, there was approximately $0.8 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 1.5 years.

Restricted Stock Awards

The Company grants restricted shares of common stock as part of its long-term incentive compensation to employees. Fair market values of restricted stock awards are determined based on the closing market price on the date of grant. Restricted stock awards vest over one to three years and stock may be sold once vested. The Company also granted 15,000 shares of common stock to certain directors in each of fiscal 2010 and 2009. Restricted stock awards granted to directors vest immediately.

The following table summarizes information relating to restricted stock activity for fiscal 2009 and for the nine month period ended June 30, 2010 (number of shares in thousands):

						Weighted
		Number of				Average Grant
		Shares				Date Fair Value
Restricted stock outstanding at September 30, 2008			285			$	4.37
Granted			48				3.24
Vested			(173	)			4.48
Forfeited			(4	)			2.99
Restricted stock outstanding at September 30, 2009			156				3.93
Granted			15				3.00
Vested			(83	)			3.67
Forfeited			(2	)			3.20
Restricted stock outstanding at June 30, 2010			86			$	4.03