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EX-31.1 - EX-31.1 - XRS Corp | c56326exv31w1.htm |
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EX-32.1 - EX-32.1 - XRS Corp | c56326exv32w1.htm |
EX-31.2 - EX-31.2 - XRS Corp | c56326exv31w2.htm |
Table of Contents
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 December 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
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)
Registrants telephone number, including area code: (952) 707-5600
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
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
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
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 (Do not check if a smaller reporting company) |
Smaller reporting company þ |
APPLICABLE ONLY TO CORPORATE ISSUERS
As of January 31, 2010, the following securities of the Registrant were outstanding: 8,786,883
shares of Common Stock, $.01 par value per share, 2,043,793 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 F Preferred Stock.
XATA Corporation
Index
Index
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
XATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Three Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Revenue |
$ | 17,523 | $ | 14,643 | ||||
Costs and expenses |
||||||||
Cost of goods sold |
9,692 | 7,595 | ||||||
Selling, general and administrative |
6,150 | 5,901 | ||||||
Research and development |
1,333 | 1,407 | ||||||
Acquisition related costs |
779 | | ||||||
Total costs and expenses |
17,954 | 14,903 | ||||||
Operating loss |
(431 | ) | (260 | ) | ||||
Interest expense on financing activities |
(779 | ) | | |||||
Acquisition related interest and mark to market |
(162 | ) | | |||||
Net interest and other expense |
(276 | ) | (412 | ) | ||||
Loss before income taxes |
(1,648 | ) | (672 | ) | ||||
Income tax expense |
| | ||||||
Net loss |
(1,648 | ) | (672 | ) | ||||
Preferred stock dividends |
(51 | ) | (49 | ) | ||||
Preferred stock deemed dividends |
(14 | ) | 5 | |||||
Net loss to common shareholders |
$ | (1,713 | ) | $ | (716 | ) | ||
Net loss per common share basic and diluted |
$ | (0.20 | ) | $ | (0.08 | ) | ||
Weighted average common and
common share equivalents |
||||||||
Basic and diluted |
8,646 | 8,468 | ||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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Table of Contents
XATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 11,754 | $ | 3,440 | ||||
Accounts receivable, less allowances
of $522 and $368 |
12,119 | 9,323 | ||||||
Inventories |
3,140 | 4,104 | ||||||
Deferred product costs |
2,207 | 2,060 | ||||||
Prepaid expenses and other current assets |
667 | 1,064 | ||||||
Total current assets |
29,887 | 19,991 | ||||||
Equipment, leased equipment and leasehold improvements, net |
5,261 | 3,980 | ||||||
Intangible assets, net |
16,798 | 10,725 | ||||||
Goodwill |
15,444 | 3,011 | ||||||
Deferred product costs, net of current portion |
2,243 | 2,470 | ||||||
Other assets |
113 | 487 | ||||||
Total assets |
$ | 69,746 | $ | 40,664 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Current portion of debt obligations |
$ | 36,572 | $ | 84 | ||||
Accounts payable |
4,655 | 5,366 | ||||||
Accrued expenses |
5,518 | 5,914 | ||||||
Deferred revenue |
5,223 | 5,280 | ||||||
Total current liabilities |
51,968 | 16,644 | ||||||
Debt obligations, net of current portion |
4,552 | 8,534 | ||||||
Deferred revenue, net of current portion |
5,473 | 6,101 | ||||||
Other long-term liabilities |
772 | 820 | ||||||
Total liabilities |
62,765 | 32,099 | ||||||
Shareholders equity |
||||||||
Preferred stock, no par, 10,000 shares authorized: |
||||||||
Series B, 4% convertible, 2,250 shares designated; shares issued and outstanding: 2,044 at December 31, 2009 and 2,004 at September 30, 2009 |
4,906 | 4,790 | ||||||
Series C, convertible, 1,400 shares designated; 1,269 shares issued and outstanding at December 31, 2009 and September 30, 2009 |
4,426 | 4,426 | ||||||
Series D, convertible, 1,600 shares designated; 1,567 shares issued and outstanding at December 31, 2009 and September 30, 2009 |
5,279 | 5,279 | ||||||
Series F, convertible, 1,400 shares designated; 1,356 shares issued and outstanding at December 31, 2009 and September 30, 2009 |
2,365 | 2,365 | ||||||
Common stock, par value $0.01 per share; 25,000 shares
authorized; shares issued and outstanding: 8,788 at
December 31, 2009 and 8,789 at September 30, 2009 |
88 | 88 | ||||||
Additional paid-in capital |
32,323 | 32,536 | ||||||
Accumulated deficit |
(42,632 | ) | (40,919 | ) | ||||
Accumulated other comprehensive income |
226 | | ||||||
Total shareholders equity |
6,981 | 8,565 | ||||||
Total liabilities and shareholders equity |
$ | 69,746 | $ | 40,664 | ||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
Table of Contents
XATA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in thousands)
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series B | Series C | Series D | Series F | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-In | Comprehensive | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income | Deficit | 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 |
| | | | | | | | | | 287 | | | 287 | ||||||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted shares
of common stock |
| | | | | | | | (1 | ) | | | | | | |||||||||||||||||||||||||||||||||||||||||
Cost related to issuance of
convertible debt |
| | | | | | | | | | (500 | ) | | | (500 | ) | ||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends |
40 | 102 | | | | | | | | | | | (51 | ) | 51 | |||||||||||||||||||||||||||||||||||||||||
Preferred stock deemed dividends |
| 14 | | | | | | | | | | | (14 | ) | | |||||||||||||||||||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation
adjustment |
226 | 226 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss |
(1,648 | ) | (1,648 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive loss |
(1,422 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2009 |
2,044 | $ | 4,906 | 1,269 | $ | 4,426 | 1,567 | $ | 5,279 | 1,356 | $ | 2,365 | 8,788 | $ | 88 | $ | 32,323 | $ | 226 | $ | (42,632 | ) | $ | 6,981 | ||||||||||||||||||||||||||||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
Table of Contents
XATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Operating activities |
||||||||
Net loss |
$ | (1,648 | ) | $ | (672 | ) | ||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
935 | 733 | ||||||
Amortization of debt financing costs |
458 | 63 | ||||||
Non-cash interest expense on convertible debt |
313 | | ||||||
Non-cash charges for issuance of equity securities related to the
acquisition of Turnpike Global Technologies |
162 | | ||||||
Stock based compensation |
287 | 343 | ||||||
Changes in assets and liabilities, net of impact of acquisition: |
||||||||
Accounts receivable, net |
(1,941 | ) | 2,547 | |||||
Inventories |
964 | (534 | ) | |||||
Deferred product costs |
80 | (486 | ) | |||||
Prepaid expenses and other assets |
418 | 440 | ||||||
Accounts payable |
(1,322 | ) | (751 | ) | ||||
Accrued expenses |
(1,366 | ) | (1,584 | ) | ||||
Deferred revenue |
(685 | ) | 308 | |||||
Net cash (used in) provided by operating activities |
(3,345 | ) | 407 | |||||
Investing activities |
||||||||
Purchase of equipment and leasehold improvements |
(381 | ) | (157 | ) | ||||
Acquisition of Turnpike Global Technologies, net of cash acquired |
(9,451 | ) | | |||||
Net cash used in investing activities |
(9,832 | ) | (157 | ) | ||||
Financing activities |
||||||||
Borrowings on long-term obligations |
30,200 | 12,076 | ||||||
Payments on long-term obligations |
(8,636 | ) | (12,328 | ) | ||||
Payments on financing costs |
(75 | ) | | |||||
Net cash provided by (used in) financing activities |
21,489 | (252 | ) | |||||
Effects of exchange rate on cash |
2 | | ||||||
Increase (decrease) in cash and cash equivalents |
8,314 | (2 | ) | |||||
Cash and cash equivalents |
||||||||
Beginning |
3,440 | 8,904 | ||||||
Ending |
$ | 11,754 | $ | 8,902 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash payments for interest |
$ | 1,171 | $ | 398 | ||||
Supplemental schedule of noncash investing and financing activities |
||||||||
Assets acquired under capital lease obligation |
$ | 10 | $ | | ||||
Preferred stock deemed dividends |
$ | 14 | $ | (5 | ) | |||
Preferred stock dividends |
$ | 51 | $ | 17 | ||||
Preferred stock dividends paid |
$ | 102 | $ | 98 |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 Companys 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 GeoLogic Solutions, Inc and Turnpike Global Technologies, Inc. and Turnpike Global
Technologies LLC (combined Turnpike). 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 Companys determination of
fair value relating to the software and services elements in multiple-element arrangements is based
on vendor-specific objective evidence (VSOE). The Companys 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-
7
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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
Companys 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 customers 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 customers 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 December 31, 2009 and September
30, 2009 was $0.5 million and $0.4 million, respectively.
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
8
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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.
Basis of Presentation
Certain amounts from the prior years financial statements have been reclassified to conform to the
presentation that was determined later in the prior year and reflected in the financial statements
beginning with the second quarter of fiscal 2009. These reclassifications resulted from a detailed
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 |
Subsequent Events
The Company has evaluated all subsequent events through February 16, 2010, which represents the
filing date of this Quarterly Report on Form 10-Q with the Securities and Exchange Commission, to
ensure that this Quarterly Report on Form 10-Q includes appropriate disclosure of events both
recognized in the financial statements as of December 31, 2009, and events which occurred
subsequent to December 31, 2009 but were not recognized in the financial statements.
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
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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 instruments 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 December 31, 2009,
according to the valuation techniques we used to determine their fair values.
December 31, | Fair Value Measurements at Reporting Date Using | |||||||||||||||
2009 | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: |
||||||||||||||||
Contingent earn out |
$ | 6,451 | $ | | $ | | $ | 6,451 | ||||||||
Common shares to be issued |
2,485 | 2,485 | | | ||||||||||||
Total |
$ | 8,936 | $ | 2,485 | $ | | $ | 6,451 | ||||||||
The carrying amounts of the Companys financial instruments, which include cash and cash
equivalents, accounts receivable, sales-type lease receivables, accounts payable, convertible debt
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, convertible debt 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 December 31, 2009 are as follows (in thousands):
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Years ending September 30, |
||||
2010 |
$ | 154 | ||
2011 |
42 | |||
Total minimum lease payments |
196 | |||
Less: amount representing interest (at 11.71%) |
(22 | ) | ||
Present value of net minimum sales-type lease payments |
174 | |||
Less: current portion of investment in sales-type leases |
(161 | ) | ||
Investment in sales-type leases, excluding current portion |
$ | 13 | ||
Interest income from sales-type leases was approximately $8,000 and $30,000 for the three
months ended December 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 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 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):
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Office furniture and equipment |
$ | 4,687 | $ | 4,464 | ||||
Leased equipment |
1,799 | 520 | ||||||
Engineering and manufacturing equipment |
903 | 900 | ||||||
Leasehold improvements |
2,857 | 2,650 | ||||||
10,246 | 8,534 | |||||||
Less: accumulated depreciation |
(4,985 | ) | (4,554 | ) | ||||
Equipment and leasehold improvements, net |
$ | 5,261 | $ | 3,980 | ||||
Depreciation expense was approximately $0.4 million and $0.3 million for the three months
ended December 31, 2009 and 2008, respectively.
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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 December 31, 2009
there was $0.1 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 December 31, 2009, the Company had a goodwill balance of $15.4 million of which $3.0 million
resulted from the Companys acquisition of GeoLogic Solutions, Inc. on January 31, 2008 and
preliminarily $12.3 million resulted from the Companys 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 completed this review in the fourth quarter of fiscal 2009 and concluded that no
impairment existed.
The changes in the net carrying amount of goodwill for the three months ended December 31, 2009 are
as follows:
Balance at September 30, 2009 |
$ | 3,011 | ||
Goodwill from acquisition |
12,301 | |||
Translation adjustment |
132 | |||
Balance at December 31, 2009 |
$ | 15,444 | ||
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
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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 Companys 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 Companys 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. and the preliminary
allocation for Turnpike, intangible assets subject to amortization were as follows as of December
31, 2009 (in thousands):
Weighted Average | Accumulated | |||||||||||||||
Life (years) | Cost | Amortization | Net | |||||||||||||
Acquired customer contracts |
7.8 | $ | 14,917 | $ | (3,253 | ) | $ | 11,664 | ||||||||
Acquired technology |
7.0 | 2,732 | (33 | ) | 2,699 | |||||||||||
Reseller relationships |
6.0 | 1,518 | (21 | ) | 1,497 | |||||||||||
Trademark |
10.0 | 911 | (8 | ) | 903 | |||||||||||
Other intangibles |
7.0 | 49 | (14 | ) | 35 | |||||||||||
Total |
7.7 | $ | 20,127 | $ | (3,329 | ) | $ | 16,798 | ||||||||
Amortization expense was $0.5 million and $0.4 million for the three months ended December 31,
2009 and 2008, respectively. Future amortization expense, as of December 31, 2009, is expected to
be as follows (in thousands):
Years ending September 30, |
||||
2010 |
$ | 1,999 | ||
2011 |
2,666 | |||
2012 |
2,666 | |||
2013 |
2,666 | |||
2014 |
2,666 | |||
Thereafter |
4,135 | |||
Total expected amortization expense |
$ | 16,798 | ||
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
Companys 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 December 31, 2009 and September 30, 2009, the Company had accruals for product warranties of
approximately $1.7 million and $1.8 million, respectively. These amounts are included in accrued
expenses on the Companys balance sheet.
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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 December 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 $0.3 million and $0.2 million for the three
months ended December 31, 2009 and 2008, 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
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 products 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.
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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 months ended December 31, 2009 and 2008, the Company reported the
following revenues and related cost of goods sold by type:
For the Three Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Revenue: |
||||||||
Software |
$ | 10,236 | $ | 8,053 | ||||
Systems |
6,197 | 5,554 | ||||||
Services |
1,090 | 1,036 | ||||||
Total revenue |
$ | 17,523 | $ | 14,643 | ||||
For the Three Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Cost of goods sold: |
||||||||
Software |
$ | 2,639 | $ | 2,364 | ||||
Systems |
6,309 | 4,433 | ||||||
Services |
744 | 798 | ||||||
Total cost of goods sold |
$ | 9,692 | $ | 7,595 | ||||
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 and infrastructure support. Cost of systems consists of the direct product costs, warranty
costs, product repair costs, and direct personnel costs related to customer 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 total
purchase price consisting of $10.0 million in cash and 833,333 shares of common stock of the
Company. The issuance of common shares is contingent on the approval by the shareholders at the
Annual Shareholder Meeting to be held on February 17, 2010. Additionally, the Company has committed
to pay total earn-outs up to an additional 2,500,000 shares of common stock subject to shareholder
approval at the Annual Shareholder Meeting and achievement by Turnpike of certain performance goals
for 2010, 2011, and 2012 fiscal years. If shareholder approval for issuance of the shares is not
obtained, the payments identified above will be payable in cash. 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.
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In connection with financing the acquisition of Turnpike, the Company issued convertible debt
totaling $30.2 million. The convertible debt will be converted into 10,066,667 shares of Series G
preferred stock and warrants to purchase 3,020,000 common shares (with an exercise price of $3.00
per share) subject to shareholder approval at the Annual Shareholder Meeting to be held on February
17, 2010. The convertible debt carries an interest rate of 14% per annum and the principal and
interest are due on November 1, 2010, if not converted prior to such date. The Company used
proceeds from the convertible debt towards the purchase of Turnpike, payment of transaction cost,
to pay off the term loan with Partners for Growth II, L.P. (PFG) of $8.0 million and to pay a
litigation settlement. The remaining proceeds will be utilized in working capital needs and future
growth. The interest on the convertible debt 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, net |
1,419 | |||||||
Accounts payable |
(609 | ) | ||||||
Accrued expenses |
(546 | ) | ||||||
Capital lease obligations |
(1,681 | ) | ||||||
Net liabilities |
(27 | ) | ||||||
Acquired customer contracts and other intangible assets, net (3) |
6,500 | |||||||
Goodwill |
12,301 | |||||||
Total |
$ | 18,774 | ||||||
(1) | Stock amount calculated using the fair market value on the date of acquisition based on the present value of the 833,333 shares of common stock at a stated value of $3.00. | |
(2) | Earn-out potential of an additional 833,333 shares of common stock after the end of each of the 2010, 2011, and 2012 fiscal years. The amount was calculated using the estimated fair market value on the date of acquisition based on stock price and estimated probability of earn-out target achievements. | |
(3) | Intangible assets: |
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 Companys equity raise and acquisition of Turnpike on the Companys
historical results of operations. The pro forma adjustments are based on the preliminary
information available at the time of the
16
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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 December 30, 2009 and 2008, 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 Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
(unaudited) | (unaudited) | |||||||
Revenue |
$ | 19,178 | $ | 15,907 | ||||
Net loss to common shareholders |
$ | (3,222 | ) | $ | (2,965 | ) | ||
Net loss per common share basic and diluted |
$ | (0.34 | ) | $ | (0.32 | ) | ||
Weighted average common and common
share equivalents basic and diluted |
9,479 | 9,301 |
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
Companys 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 Companys 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
499,994 shares authorized and available for future equity awards as of December 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 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.
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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 | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Number of shares granted |
420 | 67 | ||||||
Fair value per share |
$ | 1.31 | $ | 0.97 | ||||
Risk-free interest rate |
3.05 | % | 2.12 | % | ||||
Expected volatility |
42.70 | % | 30.60 | % | ||||
Expected life (in years) |
6.00 | 3.50 | ||||||
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 three month period ended December 31, 2009 (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 |
420 | 2.89 | ||||||
Cancelled: |
||||||||
Forfeited |
(14 | ) | 3.65 | |||||
Options outstanding at December 31, 2009 |
2,311 | $ | 3.58 | |||||
There were no options exercised during the three months ended December 31, 2009 and 2008. The
intrinsic value of stock options outstanding and stock options outstanding and exercisable as of
December 31, 2009 was $573,000 and $26,000, respectively.
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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 December 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 |
1,300 | 9.2 | $ | 2.46 | 122 | 8.3 | $ | 2.75 | ||||||||||||||||
$3.15 - $3.99 |
125 | 8.5 | 3.67 | 51 | 4.4 | 1.96 | ||||||||||||||||||
$4.33 - $4.98 |
35 | 6.6 | 4.64 | 30 | 6.5 | 4.70 | ||||||||||||||||||
$5.03 - $5.40 |
851 | 6.7 | 5.23 | 766 | 6.7 | 5.25 | ||||||||||||||||||
2,311 | 8.2 | 3.58 | 969 | 6.8 | 4.75 | |||||||||||||||||||
As of December 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 1.6 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 fiscal 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 three month period ended December 31, 2009 (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 | ||||||
Vested |
(17 | ) | 4.38 | |||||
Forfeited |
(1 | ) | 2.99 | |||||
Restricted stock outstanding at December 31, 2009 |
138 | $ | 3.88 | |||||
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The total fair value of shares vested during the three months ended December 31, 2009 and 2008
was $47,000 and $59,000, respectively. There were no restricted stock awards granted during the
three months ended December 31, 2009. The weighted average grant date fair value of restricted
stock awards granted during the three months ended December 31, 2008 was $3.80.
At December 31, 2009, there was approximately $0.3 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 Companys 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 fiscal
2009 and the three month period ended December 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 September 30, 2009 |
241 | 2.00 | ||||||
Granted |
140 | 2.89 | ||||||
Restricted stock outstanding at December 31, 2009 |
381 | $ | 2.33 | |||||
At December 31, 2009, there was approximately $0.7 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, which generally have escalating rentals over the term of the lease. 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 December 31, 2009 are (in thousands):
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Years ending September 30, |
||||
2010 |
$ | 913 | ||
2011 |
830 | |||
2012 |
558 | |||
2013 |
545 | |||
2014 |
551 | |||
Thereafter |
147 | |||
Total |
$ | 3,544 | ||
Rental expense, including common area costs, was approximately $0.4 million for each of the
three months ended December 31, 2009 and 2008.
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
employees contribution for employee deferrals of up to 6% of their compensation. Matching
contributions were $0.1 million for each of the three months ended December 31, 2009 and 2008.
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 SVBs
Prime Rate. The balance outstanding was $0.5 million at September 30, 2009. In October 2009, the
Company paid the outstanding balance on the line of credit and subsequently cancelled the facility
with the SVB.
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 Partners for Growth
II, L.P. (PFG) bearing interest at a fixed rate of 14.5%, subject to adjustment under various
circumstances. The balance outstanding was $8.0 million at September 30, 2009. In December 2009,
the Company paid the outstanding balance of $8.0 million plus accrued interest and cancelled the
facility.
In connection with financing the acquisition of Turnpike in December 2009, the Company issued
convertible debt totaling $30.2 million. The convertible debt will be converted into 10,066,667
shares of Series G preferred stock and warrants to purchase 3,020,000 common shares subject to
shareholder approval at the Annual Shareholder Meeting to be held on February 17, 2010. The
convertible debt carries an interest rate of 14% per annum and the principal and interest are due
on November 1, 2010, if not converted prior to such date. The interest expense recorded for the
three months ended was approximately $0.3 million. The Company used proceeds of the convertible
debt towards the purchase of Turnpike, to pay off the term loan with PFG of $8.0 million and to pay
a litigation settlement. The remaining proceeds will be utilized in working capital needs and
future growth.
The Company acquired all of the outstanding equity of Turnpike for a total purchase price at
closing consisting of $10.0 million in cash and 833,333 shares of common stock of the Company. The
issuance of common shares is contingent on the approval by the shareholders at the Annual
Shareholder Meeting. Additionally, the Company has committed to pay an earn out of up to an
additional 2,500,000 shares of
common stock subject to shareholder approval at the Annual Shareholder Meeting and achievement by
Turnpike of certain performance goals for 2010, 2011, and 2012 fiscal years. Until shareholder
approval
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is received at the Annual Shareholder Meeting, the fair value of the common shares and
contingent earn out will be recorded as long term obligations of the Company. These items must be
re-measured at their fair value at the end of each period. Charges for this re-measurement were
approximately $0.2 million for the three months ended December 31, 2009.
Debt obligations consist of the following (in thousands):
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Convertible debt |
$ | 30,513 | $ | | ||||
Contingent earn out |
6,451 | | ||||||
Common shares to be issued |
2,485 | | ||||||
Senior secured revolving credit facility |
| 500 | ||||||
Secured term loan |
| 8,000 | ||||||
Capitalized leases |
1,675 | 118 | ||||||
Total debt obligations |
41,124 | 8,618 | ||||||
Less current portion of debt obligations |
36,572 | 84 | ||||||
Total debt obligations, net of current portion |
$ | 4,552 | $ | 8,534 | ||||
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 Companys 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 three months ended December 31, 2009 and 2008, the Company issued 40,000 and 38,000 shares,
respectively, of Series B Preferred Stock for payment of accrued dividends. Based on the market
value of
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the Companys 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 three months ended December 31, 2009 and 2008.
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 Companys 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 Companys 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
Companys 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 Companys 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.
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Series E and Series F
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 was converted into one share of the
Series F Preferred Stock in April 2009 and the Certificate of Designation for the Series E
Preferred Stock was cancelled. Each share of Series F Preferred Stock is convertible into one share
of the Companys common stock. The price per share of Series F 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 F 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 F Preferred Stock). In that case, the Series F Preferred Stock pays a
cumulative dividend of 4% of the original issue price per annum on each outstanding share of Series
F Preferred Stock (payable in cash). The Series F Preferred Stock has a non-participating
liquidation right equal to the original issue price, plus accrued unpaid dividends, which is senior
to the Companys common stock and the Series B, Series C, and Series D Preferred Stock. The
Company may redeem the Series F 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 this transaction, 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 Companys Series C Preferred Stock) and June 19, 2007 (in
connection with the purchase of the Companys 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 Series E Preferred Stock, the same date at which such shares were eligible for conversion.
No broker or placement agent was involved in the placement of the preferred stock and warrants in
this transaction and no commissions or other compensation was paid.
Common Stock Warrants
The Company has issued warrants for the purchase of common stock to management, consultants and
placement agents. Compensation expense associated with the warrants has not been material and has
been recorded as expense at its fair value.
The following tables summarize information relating to stock warrants for fiscal 2009 and for the
three month period ended December 31, 2009 (number of warrants in thousands):
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Weighted | ||||||||||||
Weighted | Average | |||||||||||
Number of | Average | Remaining | ||||||||||
Warrants | Exercise Price | Life (years) | ||||||||||
Warrants outstanding at September 30, 2008 |
1,995 | $ | 3.54 | 2.6 | ||||||||
Granted |
407 | |||||||||||
Cancelled |
(461 | ) | ||||||||||
Warrants outstanding at September 30, 2009 |
1,941 | 3.34 | 4.0 | |||||||||
Cancelled |
(10 | ) | ||||||||||
Warrants outstanding at December 31, 2009 |
1,931 | 3.33 | 3.8 | |||||||||
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.
Potentially dilutive securities representing approximately 4.8 million shares of common stock
outstanding at December 31, 2009 and 3.1 million shares of common stock outstanding as December 31,
2008 were excluded from the computation of diluted earnings per share because their effect would
have been antidilutive.
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Item 2. Managements 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 Companys operating results and could cause the Companys 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, 2009, 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.
XATA provides fleet management solutions to the private fleet segment of the truck transportation
industry through the XATANET solution.
With the acquisition of GeoLogic Solutions, Inc. in January of 2008, XATA expanded its solutions to
include the MobileMax productline, which provides the commercial trucking industry with wireless
asset management solutions in the for-hire segment of the over-the-road transportation sector.
In December 2009, XATA acquired Turnpike Global Technologies, a Personal Digital Assistant
(PDA)-based fleet operations solution provider. Turnpikes RouteTracker products allows XATA to
continue its growth strategy by expanding the addressable market through low-cost options to
include small and medium-size fleets in North America and key vertical markets, such as Less Than
Truckload (LTL), and the automation of fuel tax reporting.
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Over the past two decades, XATA has developed relationships with the nations largest fleets
including CVS Pharmacy, Dean Foods, Sysco, US Foodservice, and xpedx to find and develop
technologies that provide information about their fleets and transform that data into actionable
intelligence. With the acquisition of Turnpike, XATA has relationships with additional customers
such as FedEx Ground, Coca-Cola, UPS Supply Chain, and United Rental.
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 customers fleet management needs:
| Technology. XATA provides a total fleet management solution, including hardware, software and services through the following solutions: |
| XATANET, our web-based, on-demand scalable software, includes a variety of web-based enterprise applications. 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 ROI. 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. | ||
| RouteTracker has been recognized as one of the first solutions to fully automate, from end-to-end, the fuel and mileage tax process required by the International Fuel Tax Agreement (IFTA). RouteTracker interacts with various handheld devices using Bluetooth as a wireless in-cab communication medium. The information collected by RouteTracker is made available to the end-user via web-based reporting. |
| People. 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 from multibillion-dollar organizations to small, single owner operations, 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. |
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Critical Accounting Policies
Accounting policies, methods and estimates are an integral part of our financial statements and are
based upon managements 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 and rentals of systems, software
and related services. The Company recognizes revenue in accordance with Accounting Standards
Codification (ASC) 985-605 Software Revenue and ASC 605-10 Revenue Recognition Overall.
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 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 Companys determination of
fair value relating to the software and services elements in multiple-element arrangements is based
on vendor-specific objective evidence (VSOE). The Companys 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 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.
Agreements that do not meet the requirements described in ASC 985-605, results 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 Companys 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 customers 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
customers 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.
Goodwill. As of December 31, 2009, the Company had a goodwill balance of $15.4 million of which
$3.0 million resulted from the Companys acquisition of GeoLogic Solutions, Inc. on January 31,
2008 and
preliminarily $12.3 million resulted from the Companys acquisition of Turnpike on December 4,
2009.
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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 completed this review in the fourth quarter of fiscal 2009 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 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 Companys 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 Companys 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 products with a limited warranty. The Company provides
for estimated warranty costs in relation to the recognition of the associated revenue. Factors
affecting the Companys 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 December 31, 2009 and
September 30, 2009, the Company had accruals for product warranties of approximately $1.7 million
and $1.8 million, respectively. These amounts are included in accrued expenses on the
Companys balance sheet.
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 ASC 740-10 Income Tax. ASC 740-10 requires application
of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax
positions. Under ASC 740-10, 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 ASC 740-10 on the Companys consolidated financial
statements was not material and no cumulative effect adjustment was recorded to the October 1, 2007
balance of accumulated deficit. In fiscal 2009, 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.
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Results of Operations for the three months ended December 31, 2009 and 2008
The following table sets forth detail related to revenue, cost of goods sold, and gross margins:
For the Three Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Software |
||||||||
Revenue |
$ | 10,236 | $ | 8,053 | ||||
Cost of goods sold |
2,639 | 2,364 | ||||||
Gross margin |
$ | 7,597 | $ | 5,689 | ||||
Gross margin % |
74.2 | % | 70.6 | % | ||||
Systems |
||||||||
Revenue |
$ | 6,197 | $ | 5,554 | ||||
Cost of goods sold |
6,309 | 4,433 | ||||||
Gross margin |
$ | (112 | ) | $ | 1,121 | |||
Gross margin % |
-1.8 | % | 20.2 | % | ||||
Services |
||||||||
Revenue |
$ | 1,090 | $ | 1,036 | ||||
Cost of goods sold |
744 | 798 | ||||||
Gross margin |
$ | 346 | $ | 238 | ||||
Gross margin % |
31.7 | % | 23.0 | % | ||||
Total |
||||||||
Revenue |
$ | 17,523 | $ | 14,643 | ||||
Cost of goods sold |
9,692 | 7,595 | ||||||
Gross margin |
$ | 7,831 | $ | 7,048 | ||||
Gross margin % |
44.7 | % | 48.1 | % |
Revenue
Overall revenue increased 20 percent to $17.5 million for the three months ended December 31, 2009
compared to $14.6 million for the same period in fiscal 2009. The organic revenue growth, which
excludes Turnpike revenue for the one month period from the date of acquisition to December 31,
2009, was 15 percent for the three months ended December 31, 2009.
Software revenue, including monthly subscriptions from XATANET and RouteTracker solutions, and
monthly fees from MobileMax and OpCenter product lines, increased 27 percent to comprise 59 percent
of total revenue for the three months ended December 31, 2009 compared to 55 percent for the same
period in fiscal 2009. Software revenue increase is due to subscription growth and through the
launch of new functionality.
Systems revenue, which includes hardware, warranty, repair, and activation revenue, increased 12
percent to comprise 35 percent of total revenue for the three months ended December 31, 2009
compared to 38
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percent for the same period in fiscal 2009. Systems revenue is impacted by an
increase in new and existing customers purchasing upgraded color displays .
Services revenue, which includes training, implementation, installation, and professional service
revenue, increased 5 percent and comprise 6 percent of total revenue for the three months ended
December 31, 2009 compared to 7 percent for the same period in fiscal 2009. Services revenue
increased due to an increase in professional services activity compared to fiscal 2009.
Cost of Goods Sold and Gross Margin
Cost of software. Cost of software consists of communication, hosting costs, depreciation of rental
units, and direct personnel costs related to network and infrastructure support. Cost of software
increased 12 percent for the three months ended December 31, 2009 compared to the same period in
fiscal 2009 supporting software revenue growth of 27 percent over the same period. Software gross
margin improved 4 percentage points for the three months ended December 31, 2009 compared to the
same period in fiscal 2009. The margin improvement was driven by our ability to leverage our SaaS
infrastructure as the number of software subscriptions increase and revenue growth through the
launch of new functionality.
Cost of systems. Cost of systems consists of the direct product costs, warranty costs, product
repair costs, and direct personnel costs related to customer support. Cost of systems increased 42
percent for the three months ended December 31, 2009 compared to the same period in fiscal 2009
supporting systems revenue growth of 12 percent over the same period. Systems gross margins
decreased 22 percentage points for the three months ended December 31, 2009 compared to the same
period in fiscal 2009. Cost were impacted by increased warranty costs and obsolete hardware
components related to the transition to the Digi platform.
Cost of services. Cost of services consists of third party vendor costs and direct costs related to
service personnel. Cost of services decreased 7 percent to $0.7 million for the three months ended
December 31, 2009 compared to $0.8 million for the same period in fiscal 2009. Service gross
margins improved 9 percentage points for the three months ended December 31, 2009 compared to the
same period in fiscal 2009. This improvement was the result of increased professional service
revenue combined with improved utilization of services personnel compared to the same period of
fiscal 2009.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of employee salaries in our executive, sales,
client management and administration functions, sales commissions, marketing and promotional
expenses, administrative and facilities costs, and professional fees. Selling, general and
administrative expenses were $6.2 million or 35 percent of revenue for the three months ended
December 31, 2009. Included in selling, general, and administrative expenses for the three months
ended December 31, 2009 is a non-comparable item of $0.3 million related to the additional cost
structure of Turnpike for the one month period not included in fiscal 2009. Excluding this
non-comparable item, selling, general, and administrative costs for the three months ended December
31, 2009 remained relatively flat compared to $5.9 million or 40 percent of revenue for the
comparable period in fiscal 2009. Continued leveraging of selling, general and administrative
costs resulted in a 5 percentage point decrease in costs relative to revenue.
Research & Development Expenses
Research and development expenses consist of employee salaries and expenses related to development
of software and systems. Research and development expenses were $1.3 million or 8 percent of
revenue for
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the three months ended December 31, 2009 compared to $1.4 million or 10 percent of
revenue for the comparable period in fiscal 2009. Research and development expenses remained flat
as we continue to invest in improvements to our current solutions and future functionality.
Acquisition Related Costs
In connection with the acquisition of Turnpike, the Company incurred costs of approximately $0.8
million of direct out-of-pocket costs. In accordance with ASC 805 Business Combinations, the
Company expensed these costs as incurred as period costs. Prior to the adoption of ASC 850 on
October 1, 2009, these costs would have been recognized as part of the acquisition investment.
Interest Expense on Financing Activities
In connection with financing the acquisition of Turnpike, the Company issued convertible debt
totaling $30.2 million. The convertible debt will be converted into 10,066,667 shares of Series G
preferred stock and warrants to purchase 3,020,000 common shares subject to shareholder approval at
the Annual Shareholder Meeting to be held February 17, 2010. The convertible debt carries an
interest rate of 14% per annum and the principal and interest are due on November 1, 2010, if not
converted prior to such date. The non-cash interest expense recorded for the three months ended
December 31, 2009 was approximately $0.3 million. Interest expense on financing activities for the
three months ended December 31, 2009 was also impacted by the write off of the unamortized balance
of prepaid financing fees of $0.5 million associated with the retirement of several debt
facilities.
Acquisition Related Interest and Mark to Market Expense
As part of the purchase price of Turnpike, the Company agreed to issue 833,333 shares of common
stock of the Company, contingent on the approval by the shareholders at the Annual Shareholder
Meeting. Additionally, the Company has committed to pay an earn out of up to an additional
2,500,000 shares of common stock subject to shareholder approval at the Annual Shareholder Meeting
and contingent on Turnpike achieving certain performance goals for 2010, 2011, and 2012 fiscal
years. Until shareholder approval is received, the fair value of the common shares relating to the
purchase price and contingent earn out common shares will be recorded as long term obligations of
the Company. These earn-out obligation must be re-measured at their fair value at the end of each
period. Charges for this re-measurement were approximately $0.2 million for the three months ended
December 31, 2009.
Net Interest and Other Expense
Net interest and other expense decreased $0.1 million to $0.3 million for the three months ended
December 31, 2009, compared to net interest expense of $0.4 million for the comparable period in
fiscal 2009. This decrease was driven by the retirement of several debt facilities.
Income Taxes
No income tax benefit or expense was recorded for the three months ended December 31, 2009 and 2008
as the result of operating losses. The Company does not have objectively verifiable positive
evidence of future taxable income as prescribed by ASC 740 Income Tax. Accordingly, we concluded
that a full valuation allowance was appropriate. Realization of deferred tax assets is dependent on
future taxable income during the periods when deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. The amount of the net deferred tax asset
considered realizable could
be increased in the future if we return to profitability and actual future taxable income is higher
than
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currently estimated. At September 30, 2009, we had federal net operating loss carryforwards of
approximately $44.6 million.
The Company implemented the provisions of ASC 740 related to uncertain tax positions, effective
October 1, 2007. The impact of the adoption on the Companys consolidated financial statements was
not material and no cumulative effect adjustment was recorded to the October 1, 2007 balance of
accumulated deficit.
Net Loss to Common Shareholders
The Company incurred net losses to common shareholders of $2.0 million and $0.7 million for the
three months ended December 31, 2009 and 2008, respectively. Net loss to common shareholders
reflect preferred stock dividends and preferred stock deemed dividends of $65,000 and $44,000 for
the three months ended December 31, 2009 and 2008, respectively.
Liquidity and Capital Resources
As of December 31, 2009, the Company held $11.8 million in cash and cash equivalents and had
negative working capital, which is total current assets less total current liabilities, of $22.1
million. Working capital includes non-comparable items of $35.4 million of current portion of
long-term obligations which will be converted to equity pending shareholder approval at the Annual
Shareholders Meeting to be held February 17, 2010. At September 30, 2009, there was $3.4 million
in cash and cash equivalents, and working capital of $3.3 million. Excluding non-comparable items,
working capital increased by$10.0 million due to proceeds from the issuance of convertible debt net
of amounts paid for the acquisition of Turnpike, patent litigation settlement, and pay off of two
secured credit facilities relating to the acquisition of Geologic Solutions Inc.
Operating activities used cash of $3.3 million during the three months ended December 31, 2009,
while operating activities provided cash of $0.4 million during the same period in fiscal 2009.
The use of cash for operating activities increased compared to the same period in fiscal 2009 due
to the payment of the patent litigation settlement, acquisition related costs, and an increase in
accounts receivable and inventory.
Cash used in investing activities was $9.8 million for the three months ended December 31, 2009 as
the result of the acquisition of Turnpike and planned fixed asset expenditures.
Cash provided by financing activities of $21.5 million for the three months ended December 31, 2009
included $30.1 million of proceeds from the convertible debt net of fees offset by the pay off of
the Silicon Valley Bank (SVB) line of credit of $0.5 million and the Partners for Growth II,
L.P. (PFG) term loan of $8.0 million.
In connection with the financing of the acquisition of GeoLogic Solutions, Inc., the Company
entered into two secured credit facilities, a $10.0 million revolving line of credit with SVB and an
$8.0 million term loan with PFG. The balances on these facilities as of September 30, 2009 was $0.5
million and $8.0 million, respectively. In the first quarter of fiscal 2010, the Company paid the
outstanding balances on the facilities and subsequently terminated the facilities.
Pending shareholder approval in the second quarter of fiscal 2010, the convertible debt facility
will be converted into equity in the form of Series G preferred stock. Provided that the approval
is obtained at the Annual Shareholder Meeting for conversion of the convertible debt to Series G
preferred stock, the
Company would have in excess of $13.3 million in working capital and $1.2 million in current debt.
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Subsequent to the conversion of the convertible debt, the Company believes our existing funds and
vendor terms will provide adequate cash to fund operating needs for the foreseeable future.
However, it may be necessary to obtain additional funding in order to execute our growth strategy.
Our Series B Preferred Stock prohibits payment of dividends to the holders of any other capital
stock unless and until we have paid dividends accrued on the Series B Preferred Stock, which 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. At the option of the Series B Preferred Stock
holders, such dividends are payable in additional shares of Series B Preferred Stock or cash.
During the three months ended December 31, 2009 and 2008, we issued 40,000 and 38,000 shares,
respectively, of Series B Preferred Stock for payment of accrued dividends.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting
On December 31, 2009, our Chief Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Rule 13a-15(e)). In accordance with the Securities and Exchange
Commissions published guidance, the Companys assessment of internal control over financial
reporting excluded the December 4, 2009 acquisition of Turnpike, which represents approximately 3.7
percent of revenue for the three months ended December 31, 2009. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by us in reports that
we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the
Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required
disclosure.
There were no changes in our internal controls over financial reporting that occurred during our
most recent fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Our existing
control environment will incorporate Turnpike as we complete the
integration of operational processes and procedures.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
XATA was named as one of six defendants in a lawsuit, filed in the United States District Court,
Eastern District of Texas, Tyler Division (6:09-cv-00157-LED). The plaintiff, Innovative Global
Solutions (IGS), has sued Turnpike Global Technologies, L.L.C., Cadec Global, Inc., General
Electric, Trimble Navigation Ltd., Networkfleet, Inc. and XATA Corporation for infringement of
certain patents and has requested that the court assess compensatory damages against each defendant
and enjoin further infringing activities by the defendants. In December 2009, XATA settled with the
plaintiff in exchange for payment of $1.0 million. Also in December 2009, as part of the
acquisition of Turnpike by XATA, Turnpike settled with the plaintiff in exchange for payment of $0.5
million.
XATA and its wholly owned subsidiary, Geologic Solutions, Inc have been named as one of nine
defendants in a lawsuit in the United States District Court, Western District of North Carolina,
Asheville Division (1:09 cv 449). The plaintiffs alleges against XATA and Geologic that Geologic
created an unsafe product that permitted drivers to send and/or receive text messages while the
vehicle is in motion. The plaintiffs claim damages in a nonspecific amount, but exceeding $75,000.
Discovery is proceeding and at the present time XATA is unable to estimate the legitimacy of the
claims or the potential exposure if any.
Item 1A. Risk Factors.
In addition to the other information set forth in this report and our other SEC filings, you should
carefully consider the factors discussed under Risk Factors in Part I, Item 1A of our Annual
Report on Form 10-K for the year ended September 30, 2009, as updated by our subsequent SEC
filings, which could have a material impact on our business, financial condition or results of
operations. The risks described in our Annual Report on Form 10-K are not the only risks we face.
Additional risks and uncertainties not presently known to us or that we currently believe to be
immaterial may also adversely affect our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
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Item 6. Exhibits.
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32.1 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32.2 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: February 16, 2010 | XATA Corporation (Registrant) |
|||
by: | /s/ Mark E. Ties | |||
Mark E. Ties | ||||
Chief Financial Officer (Signing as Principal Financial and Accounting Officer, and as Authorized Signatory of Registrant) |
||||
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