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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
 
(Exact Name of Registrant as Specified in its Charter)
     
Minnesota   41-1641815
     
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification Number)
965 Prairie Center Drive, Eden Prairie, Minnesota 55344
 
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (952) 707-5600
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o     No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o  Non-accelerated filer o
(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
                 
            Page No.
PART I.   FINANCIAL INFORMATION        
 
               
 
  Item 1.   Consolidated Financial Statements:        
 
      Consolidated Statements of Operations for the Three Months Ended December 31, 2009 and 2008     3  
 
               
 
      Consolidated Balance Sheets as of December 31, 2009 and September 30, 2009     4  
 
               
 
      Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended December 31, 2009 and the Twelve Months Ended September 30, 2009     5  
 
               
 
      Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2009 and 2008     6  
 
               
 
      Notes to Consolidated Financial Statements     7  
 
               
 
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operation     26  
 
               
 
  Item 4.   Controls and Procedures     34  
 
               
PART II.   OTHER INFORMATION        
 
               
 
  Item 1.   Legal Proceedings     35  
 
               
 
  Item 1A.   Risk Factors     35  
 
               
 
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     35  
 
               
 
  Item 3.   Defaults upon Senior Securities     35  
 
               
 
  Item 4.   Submission of Matters to a Vote of Security Holders     35  
 
               
 
  Item 5.   Other Information     35  
 
               
 
  Item 6.   Exhibits     36  
 
               
SIGNATURES     37  
 
               
EXHIBITS        
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
XATA CORPORATION
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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XATA CORPORATION
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

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XATA CORPORATION
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

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XATA CORPORATION
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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Significant Accounting Policies
Presentation
The accompanying unaudited consolidated financial statements were prepared by XATA Corporation (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures made herein are adequate to make the information presented not misleading.
In the opinion of management, the consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the financial condition, results of operations, and cash flows for the periods presented. Results of operations for the periods presented are not necessarily indicative of results to be expected for any other interim period or for the full year. These consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto in its Form 10-K for the year ended September 30, 2009 and Annual Report to Shareholders filed with the SEC.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries 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 Company’s determination of fair value relating to the software and services elements in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company’s assessment of VSOE for each element is either the price charged when the same element is sold separately or the price established by management if that item is not yet sold separately. The Company has analyzed all of the elements included in its multiple-

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

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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 year’s 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 instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The following tables set forth by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis at 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 Company’s 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 Company’s acquisition of GeoLogic Solutions, Inc. on January 31, 2008 and preliminarily $12.3 million resulted from the Company’s 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 Company’s analysis is based on available information and on assumptions and projections it considers to be reasonable and supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on the Company’s best estimate of projected future cash flows. If necessary, the Company performs subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.
Based on the allocation of the purchase price for GeoLogic Solutions, Inc. 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 Company’s product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per claim. The Company periodically assesses the adequacy of its product warranty liability based on changes in these factors.
At 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 Company’s 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 product’s essential functionality.
These updates require expanded qualitative and quantitative disclosures and are effective for fiscal years beginning on or after June 15, 2010. However, companies may elect to adopt as early as interim periods ended September 30, 2009. These updates may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company is currently evaluating the impact of adopting these updates on our consolidated financial statements.

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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 Partner’s 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 Company’s equity raise and acquisition of Turnpike on the Company’s historical results of operations. The pro forma adjustments are based on the preliminary information available at the time of the

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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 Company’s common stock were originally reserved for issuance pursuant to equity awards under the 2007 Plan. Subsequently, 1,000,000 shares were approved for addition to the 2007 Plan at the 2009 Annual Shareholders Meeting. The 2007 Plan has an evergreen provision in which the maximum number of shares that may be issued under the 2007 Plan shall be cumulatively increased on January 1, 2008 and on each January 1 thereafter for nine years by the lesser of (i) 500,000 Common Shares, (ii) 3% of the Company’s outstanding Common Shares, on an as-converted basis, as of the preceding December 31 and (iii) a number of Common Shares determined by the Board or Committee. The Company has 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 Company’s stock on the date of grant. Restricted stock units vest over a period of three years for employees.
The following table summarizes information relating to restricted stock unit activity for 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 employee’s 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 SVB’s 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 Partner’s 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 Company’s common stock. The price per share of the Series B Preferred Stock and the conversion price for the common stock were equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series B Preferred Stock pays a cumulative dividend of 4% of the original issue price per annum (payable semi-annually) on each outstanding share of Series B Preferred Stock. The dividend is payable in additional shares of Series B Preferred Stock rather than cash, at the option of the holders, and has a non-participating preferred liquidation right equal to the original issue price plus accrued unpaid dividends.
For the 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 Company’s common stock on the date of the dividend payment, the payment of the dividend in additional shares of Series B Preferred Stock resulted in a non-cash dividend of $0.1 million for each of the 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 Company’s common stock. The price per share of Series C Preferred Stock and the conversion price for the common stock is equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series C Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in the Certificate of Designation of the Series C Preferred Stock). In that case, the Series C Preferred Stock pays a cumulative dividend of 4% of the original issue price per annum on each outstanding share of Series C Preferred Stock (payable in cash). The Series C Preferred Stock has a non-participating liquidation right equal to the original issue price, plus accrued unpaid dividends which are senior to the Company’s common stock and junior to the Series B Preferred Stock. The Company may redeem the Series C Preferred Stock at its option after five years from the date of issuance at the original issue price, plus accrued unpaid dividends, if the market value of the common stock is at least three times the then effective conversion price for a specified period.
Series D
In June 2007, the Company sold 1,567,000 shares of Series D Preferred Stock for $6.0 million, or $3.83 per share. Each share of the Series D Preferred Stock is convertible into one share of the Company’s common stock. The price per share of Series D Preferred Stock and the conversion price for the common stock is equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series D Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in the Certificate of Designation of the Series D Preferred Stock). In that case, the Series D Preferred Stock pays a cumulative dividend of 4% of the original issue price per annum on each outstanding share of Series D Preferred Stock (payable in cash). The Series D Preferred Stock has a non-participating liquidation right equal to the original issue price, plus accrued unpaid dividends which are senior to the Company’s common stock and junior to the Series B and Series C Preferred Stock. The Company may redeem the Series D Preferred Stock at its option after five years from the date of issuance at the original issue price, plus accrued unpaid dividends, if the market value of the common stock is at least three times the then effective conversion price for a specified period.

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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 Company’s 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 Company’s 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 Company’s Series C Preferred Stock) and June 19, 2007 (in connection with the purchase of the Company’s Series D Preferred Stock), so that such warrants are now exercisable until the seventh anniversary (instead of the fifth anniversary) of the original date of issuance. The aggregate fair value of the warrants was $535,000, of which $129,000 related to the modification of the Series C and Series D warrants. The warrants permit “cashless exercise.”
In connection with this transaction, the Company recognized a one-time, non-cash deemed dividend of $484,000 relating to the beneficial conversion portion of the preferred stock. The beneficial conversion portion was determined by allocating the proceeds on a fair value basis between the preferred stock and the warrants. The amount of the deemed dividend was the difference between the deemed fair value of the Series E Preferred Stock and the purchase price on the date of the transaction. The deemed dividend was recorded as an addition to preferred stock with a corresponding increase to accumulated deficit. The addition was recognized at the date of issuance of the 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
Except for the historical information contained herein, the matters discussed in this Report on Form 10-Q are forward-looking statements involving risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Numerous factors, risks and uncertainties affect the Company’s operating results and could cause the Company’s actual results to differ materially from forecasts and estimates or from any other forward-looking statements made by, or on behalf of, the Company, and there can be no assurance that future results will meet expectations, estimates or projections. Risks and uncertainties about us include, but are not limited to, the following:
    although we have generated operating income and net income recently, operating losses may occur in the future and may be in excess of amounts that could be funded from operations and thus we may be dependent upon external investment to support our operations during these periods;
 
    we will continue to be dependent upon positioning systems and communication networks owned and controlled by others, and accordingly, their problems may adversely impact us;
 
    for the foreseeable future, we are dependent upon the continued receipt and fulfillment of new orders for our current products;
 
    our growth and profitability depend on our timely introduction and market acceptance of new products, our ability to continue to fund research and development activities, and our ability to establish and maintain strategic partner relationships.
Further information regarding these and other risks is included in “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 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. Turnpike’s 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 nation’s 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 customer’s 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 management’s current judgments. Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements. Note 1 of the Notes to Financial Statements includes a summary of the significant accounting policies and methods we use. The following is a discussion of what we believe to be the most critical of these policies and methods.
Revenue Recognition. The Company derives its revenue from sales 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 Company’s determination of fair value relating to the software and services elements in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company’s assessment of VSOE for each element is either the price charged when the same element is sold separately or the price established by management if that item is not yet sold separately. The Company has analyzed all of the elements included in its multiple-element 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 Company’s accounts receivable and investment in sales-type leases receivable are due from companies with fleet trucking operations in a variety of industries. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required, although sales-type leases receivable are secured by a retained security interest in the leased equipment. Accounts receivable are typically due from customers within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivables are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company reserves for these accounts receivable by increasing bad debt expense when they are determined to be uncollectible. Payments subsequently received, or otherwise determined to be collectible, are treated as recoveries that reduce bad debt expense.
Goodwill. As of December 31, 2009, the Company had a goodwill balance of $15.4 million of which $3.0 million resulted from the Company’s acquisition of GeoLogic Solutions, Inc. on January 31, 2008 and preliminarily $12.3 million resulted from the Company’s 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 Company’s analysis is based on available information and on assumptions and projections it considers to be reasonable and supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on the Company’s best estimate of projected future cash flows. If necessary, the Company performs subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.
Product Warranties. The Company sells its products with a limited warranty. The Company provides for estimated warranty costs in relation to the recognition of the associated revenue. Factors affecting the Company’s product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per claim. The Company periodically assesses the adequacy of its product warranty liability based on changes in these factors. At 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 Company’s 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 Company’s consolidated financial statements was not material and no cumulative effect adjustment was recorded to the October 1, 2007 balance of accumulated deficit. In 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 Company’s 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 Partner’s 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 Commission’s published guidance, the Company’s 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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