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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 June 30, 2011
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 þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
 
      (Do not check if a smaller reporting company)    
APPLICABLE ONLY TO CORPORATE ISSUERS
As of July 25, 2011, the following securities of the Registrant were outstanding: 10,0681,573 shares of Common Stock, $.01 par value per share, 2,168,773 shares of Series B Preferred Stock, 1,269,036 shares of Series C Preferred Stock, 1,566,580 shares of Series D Preferred Stock, 1,353,605 of Series F Preferred Stock and 10,666,663 shares of Series G Preferred Stock.
 
 

 


 

Xata Corporation
Index
         
    Page No.
PART I. FINANCIAL INFORMATION
       
 
Item 1. Consolidated Financial Statements (Unaudited):
       
 
    3  
 
    4  
 
    5  
 
    6  
 
    7  
 
    26  
 
       
    32  
 
       
 
    33  
 
    33  
 
    33  
 
    33  
 
    33  
 
    33  
 
    33  
 
    34  
 
EXHIBITS
       
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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Xata Corporation
Consolidated Statements of Operations (Unaudited)
                                 
    For the Three Months Ended     For the Nine Months Ended  
    June 30,     June 30,  
In thousands, except per-share data   2011     2010     2011     2010  
Revenue
                               
Software
  $ 11,381     $ 11,042     $ 34,102     $ 31,508  
Hardware systems
    4,875       5,362       11,507       17,142  
Services
    768       984       2,134       3,213  
Other
          566             1,719  
 
                       
Total revenue
    17,024       17,954       47,743       53,582  
 
                               
Costs and expenses
                               
Cost of goods sold
    9,119       8,912       23,420       27,669  
Selling, general and administrative
    5,840       6,627       18,617       19,702  
Research and development
    2,697       1,759       7,168       4,692  
Acquisition related costs
                      837  
 
                       
Total costs and expenses
    17,656       17,298       49,205       52,900  
 
                       
 
Operating (loss) income
    (632 )     656       (1,462 )     682  
Net interest and other expense
    (93 )     (28 )     (272 )     (392 )
Interest expense on financing activities
                      (1,358 )
Acquisition related interest and mark to market
          (2 )           (356 )
 
                       
 
(Loss) income before income taxes
    (725 )     626       (1,734 )     (1,424 )
Income tax benefit
    (289 )           (486 )      
 
                       
 
Net (loss) income
    (436 )     626       (1,248 )     (1,424 )
 
Preferred stock dividends
    (54 )     (52 )     (162 )     (155 )
Preferred stock deemed dividends
    22       (23 )     40       (1,691 )
 
                       
 
Net (loss) income to common shareholders
  $ (468 )   $ 551     $ (1,370 )   $ (3,270 )
 
                       
 
                               
Net (loss) income per common share:
                               
Basic
  $ (0.04 )   $ 0.06     $ (0.13 )   $ (0.36 )
Diluted
  $ (0.04 )   $ 0.02     $ (0.13 )   $ (0.36 )
 
                               
Weighted average common and common share equivalents:
                               
Basic
    10,667       9,718       10,427       9,170  
Diluted
    10,667       26,359       10,427       9,170  
The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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Xata Corporation
Consolidated Balance Sheets (Unaudited)
                 
    June 30,     September 30,  
In thousands   2011     2010  
ASSETS
Current assets
               
Cash and cash equivalents
  $ 15,233     $ 13,374  
Accounts receivable, less allowances of $375 at June 30, 2011 and $444 at September 30, 2010
    9,508       11,392  
Inventories
    2,205       3,047  
Deferred product costs
    1,348       2,042  
Prepaid expenses and other current assets
    1,239       1,260  
 
           
Total current assets
    29,533       31,115  
 
Equipment, leased equipment and leasehold improvements, net
    8,961       5,798  
Intangible assets, net
    13,235       14,901  
Goodwill
    17,911       17,048  
Deferred product costs, net of current portion
    1,031       1,757  
Other assets
    876       420  
 
           
Total assets
  $ 71,547     $ 71,039  
 
           
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
Current portion of debt obligations
  $ 1,338     $ 839  
Accounts payable
    6,258       5,138  
Accrued expenses
    5,211       4,872  
Deferred revenue
    3,520       5,070  
 
           
Total current liabilities
    16,327       15,919  
 
Debt obligations, net of current portion
    1,245       485  
Deferred revenue, net of current portion
    2,138       3,591  
Deferred tax liabilities
    1,780       1,905  
Other long-term liabilities
    596       638  
 
           
Total liabilities
    22,086       22,538  
 
Shareholders’ equity
               
Preferred stock, no par, 50,000 shares authorized; 16,750 shares designated; shares issued and outstanding: 16,426 at June 30, 2011 and 16,344 at September 30, 2010
    44,149       43,980  
Common stock, par value $0.01 per share; 100,000 shares authorized; shares issued and outstanding: 10,681 at June 30, 2011 and 9,816 at September 30, 2010
    107       98  
Contingent common stock earn-out
    4,062       6,452  
Additional paid-in capital
    44,822       41,539  
Accumulated deficit
    (45,499 )     (44,129 )
Accumulated other comprehensive income
    1,820       561  
 
           
Total shareholders’ equity
    49,461       48,501  
 
           
Total liabilities and shareholders’ equity
  $ 71,547     $ 71,039  
 
           
The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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Xata Corporation
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
                                                                         
                                                            Accumulated        
                                    Contingent     Additional             Other        
    Preferred Stock     Common Stock     Common Stock     Paid-In     Accumulated     Comprehensive        
In thousands   Shares     Amount     Shares     Amount     Earn-Out     Capital     Deficit     Income     Total  
Balance at September 30, 2009
    6,196     $ 16,860       8,789     $ 88     $     $ 32,536     $ (40,919 )   $     $ 8,565  
 
                                                                       
Stock based compensation
                                  1,210                   1,210  
Issuance of common stock for share based compensation awards
                221       2             2                   4  
Issuance of common stock for acquisition of Turnpike Global Technologies
                810       8             2,422                   2,430  
Forfeiture of restricted shares of common stock
                (4 )                                    
Contingent common stock earn-out
                            6,452                         6,452  
Issuance of preferred stock and warrants
    10,067       26,877                         3,715                   30,592  
Record the beneficial conversion feature
                                  1,654       (1,654 )            
Preferred stock dividends
    81       206                               (208 )           (2 )
Preferred stock deemed dividends
          37                               (37 )            
Comprehensive loss:
                                                                       
Foreign currency translation adjustment
                                              561       561  
Net loss
                                        (1,311 )           (1,311 )
 
                                                                     
Total comprehensive loss
                                                                    (750 )
 
                                                     
Balance at September 30, 2010
    16,344       43,980       9,816       98       6,452       41,539       (44,129 )     561       48,501  
 
                                                                       
Stock based compensation
                                  860                   860  
Issuance of common stock for share based compensation awards
                35       1                               1  
Issuance of shares for settlement of contingent earn-out
                810       8       (2,390 )     2,382                    
Conversion of Series F perferred stock into common stock
    (2 )     (5 )     2                   5                    
Exercise of options
                18                   36                   36  
Preferred stock dividends
    84       214                               (162 )           52  
Preferred stock deemed dividends
          (40 )                             40              
Comprehensive income:
                                                                       
Foreign currency translation adjustment
                                              1,259       1,259  
Net loss
                                        (1,248 )           (1,248 )
 
                                                                     
Total comprehensive income
                                                                    11  
     
Balance at June 30, 2011
    16,426     $ 44,149       10,681     $ 107     $ 4,062     $ 44,822     $ (45,499 )   $ 1,820     $ 49,461  
     
The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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Xata Corporation
Consolidated Statements of Cash Flows (Unaudited)
                 
    For the Nine Months Ended  
    June 30,  
In thousands   2011     2010  
Operating activities
               
Net loss
  $ (1,248 )   $ (1,424 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization of intangibles
    4,675       3,707  
Amortization of debt financing costs
          458  
Non-cash interest expense on convertible debt
          892  
Non-cash charges for issuance of equity securities related to the acquisition of Turnpike Global Technologies
          357  
Loss on disposal of assets
    7        
Stock based compensation
    860       1,026  
Changes in assets and liabilities, net of impact of acquisition:
               
Accounts receivable, net
    1,923       141  
Inventories
    890       1,566  
Deferred product costs
    1,419       521  
Prepaid expenses and other assets
    (58 )     356  
Accounts payable
    (146 )     (226 )
Accrued expenses
    (388 )     (1,634 )
Deferred revenue
    (3,002 )     (2,365 )
 
           
Net cash provided by operating activities
    4,932       3,375  
 
               
Investing activities
               
Purchase of equipment and leasehold improvements
    (2,308 )     (2,063 )
Acquisition of Turnpike Global Technologies, net of cash acquired
          (9,451 )
 
           
Net cash used in investing activities
    (2,308 )     (11,514 )
 
               
Financing activities
               
Borrowings on long-term obligations, net of costs
          29,709  
Payments on long-term obligations
    (885 )     (9,460 )
Proceeds from issuance of common stock
    36       4  
 
           
Net cash (used in) provided by financing activities
    (849 )     20,253  
 
               
Effects of exchange rate on cash
    84       (3 )
 
           
 
               
Increase in cash and cash equivalents
    1,859       12,111  
 
               
Cash and cash equivalents
               
Beginning
    13,374       3,440  
 
           
Ending
  $ 15,233     $ 15,551  
 
           
Cash payments for interest
  $ 142     $ 406  
Supplemental schedule of noncash investing and financing activities
               
Assets acquired under capital lease obligation
  $ (2,143 )   $ 161  
Preferred stock deemed dividends
  $ 40     $ 1,691  
Preferred stock dividends
  $ 162     $ 155  
Preferred stock dividends paid
  $ 214     $ 206  
Conversion of debt into Series G preferred stock and warrants
  $     $ 30,592  
Conversion of Series F perferred stock into common stock
  $ 5     $  
Contingent common stock earn-out related to purchase of Turnpike Global Technologies
  $     $ 6,452  
Issuance of shares for settlement of contingent earn-out
  $ 2,390     $ 2,430  
The accompanying notes are an integral part of the consolidated financial statements (unaudited).

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Xata Corporation
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, 2010 and Annual Report to Shareholders filed with the SEC.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Turnpike Global Technologies, Inc. and Turnpike Global Technologies LLC (combined “Turnpike”) and GeoLogic Solutions, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Adoption of New Accounting Principles
In September 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and arrangements that include software elements (new accounting principles). The new accounting principles permitted prospective or retrospective adoption. As such, the Company elected prospective adoption of Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements (ASU 2009-13) and Accounting Standards Update 2009-14, Software (Topic 985)—Certain Revenue Arrangements that Include Software Elements (ASU 2009-14) during the first quarter of fiscal 2011. ASU 2009-13 amended existing accounting guidance for revenue recognition for multiple-element arrangements. To the extent a deliverable within a multiple-element arrangement is not accounted for pursuant to other accounting standards, including ASC 985-605, Software-Revenue Recognition, ASU 2009-13 establishes a selling price hierarchy that allows for the use of an estimated selling price (ESP) to determine the allocation of arrangement consideration to a deliverable in a multiple element arrangement where neither vendor-specific objective evidence (VSOE) nor third-party evidence (TPE) is available for that deliverable. ASU 2009-14 modifies the scope of ASC 985-605 to exclude tangible products containing software components and nonsoftware components that function together to deliver the product’s essential functionality. In addition, ASU 2009-14 provides guidance on how a vendor should allocate arrangement consideration to nonsoftware and software deliverables in an arrangement where the vendor sells tangible products containing software components that are essential in delivering the tangible product’s functionality. The adoption of the above referenced guidance did not have a significant impact on the manner in which the Company recognizes revenue and is not expected to have any significant impact in the future.

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Revenue Recognition
The Company derives its revenue from sales of (1) software, which includes monthly subscriptions from the XataNet and Xata Turnpike solutions, monthly fees from the MobileMax solution and activation fees; (2) hardware systems, which includes hardware with embedded software, warranty and repair revenue; and (3) services, which includes training, implementation, installation and professional service revenue.
The Company sells its products in two ways: direct sales and channel sales. The Company’s direct sales include sales of the Company’s solutions primarily to fleet operators and logistics providers. The Company’s channel sales are driven from Company personnel working in tandem with partners to sell the Company’s products to fleets of all sizes and types.
The Company’s customers typically enter into multi-year agreements with automatic renewal features. Customers are provided the option to terminate their contract at any time, but must pay through the end of the governing contract, unless termination resulted from a performance issue driven by the Company. Historically Xata Turnpike customers operated under month-to-month contracts and were allowed to provide a 30-day termination notice. Beginning in fiscal 2011 Xata Turnpike direct customer contract renewals were for a minimum of a one-year term, with an automatic one-year renewal period, consistent with the Company’s historic practices.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss has been transferred. For most of the Company’s hardware systems, software license and service sales, these criteria are met at the time the hardware system is shipped and/or the services are provided. The Company recognizes revenue from the sale of a hardware system and software bundled with the hardware system that is essential to the functionality of the hardware system in accordance with revenue recognition accounting guidance for arrangements with multiple deliverables. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions: (1) standalone sales of software products; and (2) sales of software bundled with a hardware system, which is not essential to the functionality of the hardware system.
The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. In addition, revenue from MobileMax product lines are deferred and recognized ratably over the term of the agreement in accordance with ASC 985-605, Software-Revenue Recognition, as discussed further below.
Revenue Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements including tangible products that contain software essential to the tangible product’s functionality and undelivered software elements related to the tangible product’s essential software, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (1) vendor-specific objective evidence of fair value, if available, (2) third-party evidence of selling price if VSOE is not available, and (3) best estimate of the selling price if neither VSOE nor TPE is available (a description as to how the Company determined VSOE, TPE and ESP is provided below). The Company limits the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or the meeting of any specified performance conditions.
To determine the selling price in multiple-element arrangements, the Company established VSOE of selling price using the price charged for a deliverable when sold separately and for software subscriptions, based on the renewal rates offered to customers. For nonsoftware multiple-element arrangements, TPE is established by evaluating similar and interchangeable competitor products or services in standalone arrangements with similarly situated customers. If the Company is unable to determine the selling price because VSOE or TPE doesn’t exist, ESP is determined for the purposes of allocating the arrangement by considering several external and internal

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factors including, but not limited to, pricing practices, margin objectives, competition, geographies in which the Company offers its products and services, internal costs and stage of the product lifecycle. The determination of ESP is made through consultation with and approval by management, taking into consideration the Company’s go-to-market strategy. As the Company’s competitors’ pricing and go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes to the determination of VSOE, TPE and ESP. As a result, the Company’s future revenue recognition for multiple-element arrangements could differ materially from its results in the current period. Selling prices are analyzed on an annual basis or more frequently if significant fluctuations in the selling prices occur.
The Company has identified three deliverables in arrangements involving the sale of its XataNet and Xata Turnpike solutions including transactions which the customer purchases the Routetracker unit. The first deliverable is the hardware system, which includes the software that is essential to the functionality of the hardware system. The second deliverable is the monthly subscription that covers the communication charge related to the XataNet solution, hosting fees and continued support. The final deliverable includes certain services that may be requested by the customer. The Company has determined that each deliverable has stand alone value and the deliverables can be separated into multiple units of accounting. The Company has allocated revenue between the three deliverables using the relative selling price method based on the Company’s ESPs. Amounts allocated to the delivered hardware system and essential software are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to subscription, hosting fees, and other continued support are recognized on a straight-line basis over the term of the agreement with the customer. Finally, amounts allocated to the services are recognized upon performance.
The Company’s process for determining its ESP considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered by the Company in developing the ESPs include prices charged by the Company for similar offerings, the Company’s historical pricing practices and the life cycle of the hardware system. The Company may also consider additional factors as appropriate, including the pricing of competitive alternatives if they exist, and product-specific business objectives.
Revenue Recognition for Software Products
The Company accounts for multiple element arrangements that consist only of software or software-related products, which include the Company’s MobileMax solution, its Xata Turnpike solution including transactions which the customer selects the no up-front cost option, which results in the Company providing a Routetracker unit for no initial charge, as well as its add-on product offerings, in accordance with industry specific accounting guidance for software and software-related transactions, ASU 985-605. For such transactions, revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by VSOE. If the Company cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements, the Company uses the residual method to recognize revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.
Other Revenue Recognition Policies Applicable to Software and Nonsoftware Elements
Many of the Company’s software arrangements include services, such as implementation, installation, driver education and consulting services sold separately under engagement contracts and are included as a part of the Company’s services business. In certain instances, revenues from these arrangements are accounted for separately from new software revenues because the arrangements qualify as services transactions as defined in ASC 985-605. The more significant factors considered in determining whether the revenues should be accounted for separately include the nature of services (i.e. consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Revenues

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for the aforementioned services are generally recognized as the services are performed. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenues are deferred until the uncertainty is sufficiently resolved.
Finally, the Company has entered into agreements with various companies, which provide a mechanism for continued development, marketing and distribution of a wider variety of comprehensive solutions to meet the needs of the changing marketplace. The Company recognizes revenue generated under the aforementioned agreements in accordance with ASC 605-45 — Revenue Recognition — Principal Agent Considerations, based upon the terms of each partnership 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 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. 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, the Company’s previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company reserves for these accounts receivable by increasing bad debt expense when they are determined to be uncollectible. Payments subsequently received, or otherwise determined to be collectible, are treated as recoveries that reduce bad debt expense.
Foreign Currency Translation
The financial statements with a functional currency other than the U.S. Dollar have been translated into U.S. Dollars using the current rate method. Assets and liabilities have been translated using the exchange rates at the balance sheet date. Income and expense amounts have been translated using the average exchange rates during the period. Translation gains or losses resulting from the changes in exchange rates have been reported as a component of accumulated other comprehensive income in the statements of changes in shareholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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. The Company has not experienced any losses from excess balances in the past and does not expect to in the future.
Fair Value of Financial Instruments
The Company performs fair value measurements in accordance with the guidance provided by the FASB’s Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, the Company considers the principal or most advantageous market to transact and considers assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.

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ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’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 — Quoted prices for identical assets or liabilities in active markets;
Level 2 — Inputs other than Level 1 that are directly or indirectly observable in the marketplace; or
Level 3 — Unobservable inputs which are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.
The Company’s valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.
Assets and Liabilities Measured at Fair Value
The Company has money market fund assets and a contingent earn out liability to non-accredited U.S. shareholders carried at fair value. The following paragraphs provide additional information regarding the valuation of the aforementioned balances, on a recurring basis as of June 30, 2011 and September 30, 2010:
Money market funds — The Company maintained money market funds, which are included in cash and cash equivalents on the consolidated balance sheets of $14.2 million and $13.0 million as of June 30, 2011 and September 30, 2010, respectively. The valuation techniques used to measure the fair values of the Company’s money market funds, that were classified as Level 1, were derived from quoted market prices as substantially all of these instruments have maturity dates (if any) within one year from the date of purchase and active markets for these instruments exist. There were no material transfers in or out of Level 1 during the nine months ended June 30, 2011.
Contingent earn out liability —The Company’s valuation techniques used to measure the fair value of the contingent earn out was based on the stock price on the date of the Turnpike acquisition and the estimated probability of earn-out target achievements. The change in the contingent earn out liability, which is included in debt obligations on the consolidated balance sheets has been summarized in the rollforward below (in thousands):
         
Balance as of September 30, 2010
  $ 181  
Payments of earn out
    (70 )
 
     
Balance as of June 30, 2011
  $ 111  
 
     
Inventories
Inventories consist of finished goods which are stated at the lower of cost or market. Cost is determined using the average cost method, which approximates the first-in, first-out method.

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Equipment, Leased Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of (in thousands):
                 
    June 30,     September 30,  
    2011     2010  
Office furniture and equipment
  $ 9,164     $ 5,558  
Leased equipment
    5,070       2,959  
Engineering and manufacturing equipment
    902       919  
Leasehold improvements
    2,538       2,452  
 
           
 
    17,674       11,888  
Less: accumulated depreciation
    (8,713 )     (6,090 )
 
           
Equipment and leasehold improvements, net
  $ 8,961     $ 5,798  
 
           
Depreciation expense included in selling, general and administrative expenses was approximately $0.6 million and $0.4 million for the three months ended June 30, 2011 and 2010, respectively, and was approximately $1.6 million and $1.1 million for the nine months ended June 30, 2011 and 2010, respectively. Depreciation on leased Xata Turnpike equipment is recorded as a cost of goods sold and was $0.4 million and $0.3 million for the three months ended June 30, 2011 and 2010, respectively, and $1.1 million and $0.7 million for the nine months ended June 30, 2011 and 2010, respectively.
Capitalized Software Development Costs
Hardware system development costs incurred after establishing technological feasibility are capitalized in accordance with ASC 350-40-35 — Internal-Use Computer Software Marketed Costs. Capitalized costs are amortized as a cost of goods sold beginning when the product is first released for sale to the general public. Amortization is computed using the ratio of current units sold to the total of current units sold and anticipated future unit sales of product utilizing the developed technology. As of June 30, 2011 and September 30, 2010, there was $0.4 million of capitalized development costs. Amortization of capitalized software is recorded as a cost of goods sold and was $6,600 and $8,700 for the three and nine months ended June 30, 2011, respectively.
Product development costs that do not meet the capitalization criteria of ASC 350-40-35 are charged to research and development expense as incurred.

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Intangible Assets
Intangible assets subject to amortization were as follows as of June 30, 2011 (in thousands):
                                         
                            Foreign        
    Weighted                     Currency        
    Average Life             Accumulated     Translation        
    (years)     Cost     Amortization     Adjustment     Net  
Acquired customer contracts
    7.8     $ 14,900     $ (6,152 )   $ 119     $ 8,867  
Acquired technology
    7.0       2,700       (639 )     236       2,297  
Reseller relationships
    6.0       1,500       (414 )     128       1,214  
Trademark
    10.0       900       (149 )     81       832  
Other intangibles
    7.0       49       (24 )           25  
 
                             
Total
    7.7     $ 20,049     $ (7,378 )   $ 564     $ 13,235  
 
                             
Amortization expense included in selling, general and administrative expenses was approximately $0.6 million for each of the three months ended June 30, 2011 and 2010, and was approximately $1.7 million for each of the nine months ended June 30, 2011 and 2010, respectively. Amortization of acquired technology is recorded as a cost of goods sold and was $0.1 million and $0.1 million for the three months ended June 30, 2011 and 2010, respectively, and $0.3 million and $0.2 million for the nine months ended June 30, 2011 and 2010, respectively.
Future amortization expense, as of June 30, 2011, is expected to be as follows (in thousands):
         
Years ending September 30,        
2011
  $ 687  
2012
    2,749  
2013
    2,749  
2014
    2,749  
2015
    2,743  
Thereafter
    1,558  
 
     
Total expected amortization expense
  $ 13,235  
 
     
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.
The Company has identified the net losses recorded in the prior three quarters as an indicator of potential impairment. The Company has evaluated these assets for impairment and has determined no impairment exists at June 30, 2011.

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Goodwill
The changes in the net carrying amount of goodwill for the nine months ended June 30, 2011 were as follows (in thousands):
         
Balance at September 30, 2010
  $ 17,048  
Foreign currency translation adjustment
    863  
 
     
Balance at June 30, 2011
  $ 17,911  
 
     
As of June 30, 2011, the Company had a goodwill balance of $17.9 million of which $13.7 million resulted from the Company’s acquisition of Turnpike on December 4, 2009.
In accordance with ASC 350-20 — Intangibles — Goodwill and Others, the Company is required to assess the carrying amount of its goodwill for impairment annually or more frequently if an event occurs indicating the potential for impairment. The Company has one operating and reporting unit that earns revenues, incurs expenses and makes available discrete financial information for review by the Company’s chief operating decision maker. Accordingly, the Company completes its goodwill impairment testing on this single reporting unit.
Testing for goodwill impairment is a two step process. The first step screens for potential impairment. If there is an indication of possible impairment the Company must complete the second step to measure the amount of impairment loss, if any. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the Company’s market capitalization with the carrying value of its net assets. If the Company’s total market capitalization is at or below the carrying value of its net assets, the Company would perform the second step of the goodwill impairment test to measure the amount of impairment loss to record, if any. The Company considers goodwill impairment test estimates critical due to the amount of goodwill recorded on its balance sheet and the judgment required in determining fair value amounts.
Historically, the Company’s market capitalization has been well above the carrying value of its equity and there has been no indication of potential impairment. The results of the Company’s most recent annual assessment performed on the first day of the fourth quarter of fiscal 2010 did not indicate any impairment of its goodwill.
The Company has evaluated these assets for impairment and has determined no impairment exists at June 30, 2011.
Product Warranties
The Company sells its products with a limited warranty. The Company provides for estimated warranty costs in relation to the recognition of the associated revenue. Factors affecting the Company’s product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per claim. The Company periodically assesses the adequacy of its product warranty liability based on changes in these factors.
At June 30, 2011 and September 30, 2010, the Company had accruals for product warranties of approximately $0.7 million and $1.0 million, respectively.
Shipping Costs
Shipping costs, which are classified as a component of cost of goods sold, were approximately $0.1 million for each of the three months ended June 30, 2011 and 2010. Shipping costs were approximately $0.3 million and $0.2 million for the nine months ended June 30, 2011 and 2010, respectively. Customer billings related to shipping and handling fees are reported as hardware systems revenue.

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Advertising Costs
Advertising costs consist primarily of ad campaigns, catalog brochures, promotional items and trade show expenses and are expensed as incurred. Advertising costs, which are included in selling, general and administrative expenses, were $0.3 million for each of the three months ended June 30, 2011 and 2010. Advertising costs were $0.9 million and $0.8 million for the nine months ended June 30, 2011 and 2010, 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. An income tax benefit of $0.3 million was recorded for the three months and $0.5 million for the nine months ended June 30, 2011 to recognize tax benefits in Canada resulting from using net operating loss to offset the deferred tax liability.
Recently Issued Accounting Standards
Performing Step 2 of the Goodwill Impairment Test: In December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350) — Intangibles — Goodwill and Other. ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The Company will adopt ASU 2010-28 in fiscal 2012 and any impairment to be recorded upon adoption will be recognized as an adjustment to beginning retained earnings. The Company is currently evaluating the impact of the pending adoption of ASU 2010-28 on the consolidated financial statements.
Disclosure Requirements Related to Fair Value Measurements: In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRSs, which provides guidance clarifying how to measure and disclose fair value. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended. The Company is currently evaluating the impact of the pending adoption of ASU 2011-04 on the consolidated financial statements.
Presentation of Comprehensive Income: In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which serves to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact of the pending adoption of ASU 2010-28 on the 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 and nine months ended June 30, 2011 and 2010, the Company reported the following revenues and related cost of goods sold by type (in thousands):
                                 
    For the Three Months Ended     For the Nine Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Revenue:
                               
Software
  $ 11,381     $ 11,042     $ 34,102     $ 31,508  
Hardware systems
    4,875       5,362       11,507       17,142  
Services
    768       984       2,134       3,213  
Other
          566             1,719  
 
                       
Total revenue
  $ 17,024     $ 17,954     $ 47,743     $ 53,582  
 
                       
                                 
    For the Three Months Ended     For the Nine Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Cost of goods sold:
                               
Software
  $ 2,878     $ 2,700     $ 8,348     $ 7,880  
Hardware systems
    5,305       5,004       12,515       16,541  
Services
    936       919       2,578       2,451  
Other
          289       (21 )     797  
 
                       
Total cost of goods sold
  $ 9,119     $ 8,912     $ 23,420     $ 27,669  
 
                       
Software revenue includes monthly subscriptions from XataNet and Xata Turnpike solutions, monthly fees from MobileMax solution and activation fees. Hardware systems revenue includes hardware, warranty and repair revenue. Services revenue includes training, implementation, installation, and professional service revenue.
Cost of software consists of communication, hosting costs, depreciation of Xata Turnpike units, and direct personnel costs related to network, infrastructure, as well as Xata Turnpike customer support. Cost of hardware systems consists of the direct product costs, warranty costs, product repair costs, and direct personnel costs related to XataNet and MobileMax technical support. Cost of services consists of third party vendor costs and direct costs related to service personnel.
Note 3. 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

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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 727,078 shares authorized and available for future equity awards as of June 30, 2011.
Stock Options
The Company accounts for share-based employee compensation plans under the provisions of ASC 718 — Compensation — Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values.
The fair value of each option is estimated at the grant date using the Black-Scholes option-pricing model. 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. The weighted average fair value at the date of grant and the assumptions used to determine such values are indicated in the following (number of shares in thousands):
                                 
    For the Three Months Ended   For the Nine Months Ended
    June 30,   June 30,
    2011   2010   2011   2010
Number of shares granted
    164       9       921       468  
Fair value per share
  $ 0.90     $ 1.41     $ 1.18     $ 1.31  
Risk-free interest rate
    2.61 %     3.07 %     2.70 %     3.06 %
Expected volatility
    41.57 %     39.50 %     41.33 %     42.35 %
Expected life (in years)
    6.00       6.00       5.92       5.94  
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 2011 and 2010. 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.

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The following table summarizes information relating to stock option activity for fiscal 2010 and for the nine month period ended June 30, 2011 (number of shares in thousands):
                 
            Weighted
            Average
            Exercise
    Shares   Price
Options outstanding at September 30, 2009
    1,905     $ 3.73  
Granted
    503       2.89  
Exercised
    (2 )     2.00  
Cancelled:
               
Expired
    (25 )     5.23  
Forfeited
    (154 )     3.42  
 
               
Options outstanding at September 30, 2010
    2,227       3.55  
Granted
    921       2.71  
Exercised
    (18 )     2.00  
Cancelled:
               
Expired
    (394 )     4.02  
Forfeited
    (224 )     2.64  
 
               
Options outstanding at June 30, 2011
    2,512     $ 3.25  
 
               
There were 17,917 options exercised during the nine months ended June 30, 2011. Total intrinsic value of stock options exercised during the three and nine months ended June 30, 2011 was $9,900. There was no intrinsic value of the stock options outstanding and stock options outstanding and exercisable as of June 30, 2011.
Information regarding options outstanding and exercisable at June 30, 2011 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 of   Contractual   Exercise   Number of   Contractual   Exercise
exercise price   Shares   Life (Years)   Price   Shares   Life (Years)   Price
$2.00 - $2.99
    1,822       8.6     $ 2.59       660       7.7     $ 2.50  
3.00 - 3.99
    93       7.9       3.31       76       7.7       3.31  
4.33 - 4.98
    35       5.1       4.64       35       5.1       4.64  
5.03 - 5.40
    562       5.4       5.31       562       5.4       5.31  
 
                                               
 
    2,512       7.8     $ 3.25       1,333       6.6     $ 3.79  
 
                                               
As of June 30, 2011, 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.

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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 a period of one to three years and stock may be sold once vested. Restricted stock awards granted to directors vest immediately.
The following table summarizes information relating to restricted stock activity for fiscal 2010 and for the nine month period ended June 30, 2011 (number of shares in thousands):
                 
            Weighted
            Average
    Number of   Grant Date
    Shares   Fair Value
Restricted stock outstanding at September 30, 2009
    156     $ 3.93  
Granted
    18       3.06  
Vested
    (92 )     3.75  
Forfeited
    (4 )     3.21  
 
               
Restricted stock outstanding at September 30, 2010
    78       3.96  
Granted
    35       2.85  
Vested
    (102 )     3.42  
 
               
Restricted stock outstanding at June 30, 2011
    11     $ 5.40  
 
               
The total fair value of shares vested was $13,500 and $0.1 million for of the three months ended June 30, 2011 and 2010, respectively. The total fair value of shares vested was $0.2 million and $0.3 million during the nine months ended June 30, 2011 and 2010, respectively. There were no restricted stock awards granted during the three months ended June 30, 2011 and 2010. The weighted average grant date fair value of restricted stock awards granted during the nine months ended June 30, 2011 and 2010 was $2.85 and $3.00, respectively.
At June 30, 2011, there was approximately $31,000 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 0.9 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.

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The following table summarizes information relating to restricted stock unit activity for fiscal 2010 and the nine month period ended June 30, 2011 (number of units in thousands):
                 
            Weighted
            Average
    Number of   Grant Date
    Shares   Fair Value
Restricted stock units outstanding at September 30, 2009
    241     $ 2.00  
Granted
    174       2.87  
Settled
    (201 )     2.20  
Cancelled:
               
Forfeited
    (29 )     2.31  
 
               
Restricted stock units outstanding at September 30, 2010
    185       2.55  
Granted
    257       2.66  
Settled
           
Cancelled:
               
Forfeited
    (61 )     2.58  
 
               
Restricted stock units outstanding at June 30, 2011
    381     $ 2.62  
 
               
There were no restricted stock units vested during the three months ended June 30, 2011. The total fair value of restricted stock units vested during the nine months ended June 30, 2011 was approximately $5,600.
In February 2010, the Company had a change in control, as defined in the employee Restricted Stock Unit agreements, due to the issuance of the Series G preferred stock. This change in control was a triggering event for the acceleration of the vesting and settlement of a portion of the Company’s outstanding restricted stock units. As a result, the Company accelerated the related cost of $0.2 million during the quarter ended June 30, 2010.
At June 30, 2011, there was approximately $1.5 million of total unrecognized compensation costs related to restricted stock units. The Company will recognize this cost over the remaining vesting periods of these units. The weighted average period over which the costs will be recognized is 1.9 years.
Note 4. 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.

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Approximate future minimum rental commitments, excluding common area costs under these non-cancelable operating leases, as of June 30, 2011 are (in thousands):
         
Years ending September 30,
       
2011
    174  
2012
    706  
2013
    685  
2014
    656  
2015
    233  
Thereafter
    59  
 
     
Total
  $ 2,513  
 
     
Rental expense, including common area costs, was $0.3 million and $0.4 million for each of the three months ended June 30, 2011 and 2010. Rental expense, including common area costs, was $1.0 million and $1.2 million for the nine months ended June 30, 2011 and 2010, respectively. All rental expenses, including common area costs were included within selling, general and administrative expenses.
401(k) Plan
The Company has a 401(k) plan covering substantially all U.S. 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 and $0.3 million for each of the three and nine months ended June 30, 2011 and 2010.
Purchase Commitments
From time to time in the ordinary course of the business the Company enters into purchase commitments for inventory, third party software licenses, etc. The Company evaluates these commitments on a quarterly basis to assure ourselves that all commitments made will be realized in the ordinary course of business given the terms of the commitment and that no event has occurred that has impaired such commitment. As of June 30, 2011 the Company believes that all commitments made will be achieved over the terms established.
Note 5. Financing Arrangements
Debt obligations consist of the following (in thousands):
                 
    June 30,     September 30,  
    2011     2010  
Capitalized leases
  $ 2,472     $ 1,143  
Contingent earn out
    111       181  
 
           
Total debt obligations
    2,583       1,324  
Less current portion of debt obligations
    1,338       839  
 
           
Total debt obligations, net of current portion
  $ 1,245     $ 485  
 
           
In connection with the financing of the acquisition of GeoLogic Solutions, Inc., in January 2008, 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. Also in connection with the acquisition of GeoLogic Solutions, Inc., the Company entered into a four year secured credit

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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. In the first quarter of fiscal 2010 both facilities were paid in full and subsequently canceled. Also, in the first quarter of fiscal 2010, the remaining unamortized balance of the related debt financing costs of $0.5 million was charged to interest expense on financing activities.
In connection with financing the acquisition of Turnpike in December 2009, the Company issued convertible debt totaling $30.2 million. On February 19, 2010, the convertible debt converted into 10,066,663 shares of Series G preferred stock and warrants to purchase 3,019,995 common shares. The convertible debt carried an interest rate of 14% per annum. The interest expense recorded for the nine months ended June 30, 2010 was approximately $0.9 million. The Company used proceeds of the convertible debt for 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 are being utilized for working capital needs and future growth.
The value of common stock relating to the Turnpike acquisition and related contingent earn outs were treated as debt until shareholder approval was received on February 17, 2010. Subsequently, these amounts were reclassified as equity. These items were re-measured at their fair value at the end of each period and on the date of shareholder approval. There were approximately $0.4 million of remeasurement charges that were recorded for the nine months ended June 30, 2010. The portion of the earn-out to be settled in cash will continue to be re-measured at fair value at the end of each period until settlement.
In connection with the acquisition of Turnpike, the Company acquired a Master Lease Agreement with Buffalo City Center Leasing, LLC (“BCCL”) effective October 1, 2007 for financing of certain equipment used in the Turnpike product offerings. Leases under the Master Lease Agreement have a term of twenty seven months and effective interest rates of between 16.1% and 16.5% with monthly payments including principal and interest. The Master Lease Agreement expired on October 4, 2010. The Company entered into the First Amendment to the Master Lease Agreement (the Amendment) on January 7, 2011, which extended the term of the Master Lease Agreement through the end of the lease term of any equipment leased under the Master Lease Agreement. Effective June 17, 2011, the Company entered into a second Master Lease Agreement with BCCL for the financing of additional equipment used in the Turnpike product offerings. Leases under the second Master Lease Agreement have a term of twenty-one months and an effective interest rate of 14.3% with monthly payments including principal and interest. The second Master Lease Agreement extends for three years or through the end of the lease term of any equipment leased under the Master Lease Agreement.
The balance of the Company’s capital lease obligation with BCCL was $2.5 million at June 30, 2011.
Note 6. Shareholders’ Equity
Common Stock
The Company is authorized to issue up to 100,000,000 shares of common stock.
In connection with the acquisition of Turnpike, the Company committed to pay total earn-outs up to an additional 2,500,000 shares of common stock upon the achievement of certain performance goals for 2010, 2011 and 2012 fiscal years. The Company has determined that the 2010 performance goals were achieved and therefore in December 2010, 809,993 shares of common stock were issued to the former shareholders of Turnpike with the value of the remaining 23,340 shares being settled in cash of $70,000.
Preferred Stock
The Company has authorized an undesignated class of preferred stock of 50,000,000 shares. The Board of Directors can issue preferred stock in one or more series and fix the terms of such stock without shareholder

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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’s Board of Directors authorized the sale of up to 1,700,000 shares of Series B Preferred Stock through a private placement. In December 2003, the Company sold 1,612,903 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 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.
In fiscal 2011 and 2010 the Company issued 84,216 and 80,946 shares, respectively, of Series B Preferred Stock to Trident for payment of accrued dividends. Based on the market value of the Company’s common stock on the date of the dividend payment, the payment of the dividend in additional shares of Series B Preferred Stock resulted in a non-cash dividend of $0.2 million in each of fiscal 2011 and 2010. There were 2,168,733 shares and 2,084,577 shares issued and outstanding at June 30, 2011 and September 30, 2010, respectively.
Series C
In August 2005, the Company’s Board of Directors authorized the sale of up to 1,400,000 shares of Series C Preferred Stock through a private placement. In September 2005, the Company sold 1,269,036 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. At June 30, 2011 and September 30, 2010, respectively, there were 1,269,036 shares issued and outstanding.
Series D
In May 2007, the Company’s Board of Directors authorized the sale of up to 1,600,000 shares of Series D Preferred Stock through a private placement. In June 2007, the Company sold 1,566,580 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. There were 1,566,580 shares issued and outstanding at June 30, 2011 and September 30, 2011, respectively.
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. In February 2011, 2,252 shares of Series F Preferred Stock were converted to common stock. At June 30, 2011 and September 30, 2010, respectively, there were 1,353,605 shares and 1,355,857 shares issued and outstanding.
Series G
In December 2009 in connection with financing the acquisition of Turnpike, the Company issued convertible debt totaling $30.2 million. The convertible debt was converted into 10,066,663 shares of Series G preferred stock at $3.00 per share on February 19, 2010, subsequent to shareholder approval. Each share of Series G Preferred Stock is convertible into one share of the Company’s common stock. There were 10,066,663 shares issued and outstanding at June 30, 2011 and September 30, 2011, respectively.

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In addition, as part of the debt conversion, the Company issued 7-year warrants to purchase 3,019,995 shares of its common stock at an exercise price of $3.00 per share. The aggregate fair value of the warrants was $3.9 million. The warrants permit “cashless exercise.”
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.
In fiscal 2010, the Company issued 3,020,000 warrants relating to the issuance of Series G Preferred Stock.
The following tables summarize information relating to stock warrants for fiscal 2010 and for the nine month period ended June 30, 2011 (number of warrants in thousands):
                         
            Weighted   Weighted
            Average   Average
    Number of   Exercise   Remaining
    Warrants   Price   Life (years)
Warrants outstanding at September 30, 2009
    1,941     $ 3.34       4.0  
Granted
    3,020                  
Cancelled
    (10 )                
 
                       
Warrants outstanding at September 30, 2010
    4,951       3.13       5.1  
Cancelled
    (147 )                
 
                       
Warrants outstanding at June 30, 2011
    4,804     $ 3.14       4.5  
 
                       
Note 7. Net Loss Per Common Share
Basic (loss) income per common share is computed based on the weighted average number of common shares outstanding by dividing net (loss) income 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 the three months ended June 30, 2011 and the nine months ended June 30, 2011 and 2010 because the effect of including such securities or obligations would have been antidilutive

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Net (loss) income per common share is based on weighted average shares outstanding as summarized in the following table:
                                 
    Three months ended     Nine Months Ended  
    2011     2010     2011     2010  
Numerator:
                               
Net (loss) income to common shareholders
  $ (468 )   $ 551     $ (1,370 )   $ (3,270 )
 
                       
Denominator:
                               
Weighted average common shares — basic
    10,667       9,718       10,427       9,170  
Effect of preferred stock
          16,316              
Effect of dilutive options, RSUs, RSAs,
          325              
 
                       
Weighted average common shares — diluted
    10,667       26,359       10,427       9,170  
 
                       
 
                               
Basic (loss) earnings per share
  $ (0.04 )   $ 0.06     $ (0.13 )   $ (0.36 )
Diluted (loss) earnings per share
  $ (0.04 )   $ 0.02     $ (0.13 )   $ (0.36 )
Potentially dilutive securities representing approximately 16.4 million shares of common stock outstanding for the three months ended June 30, 2011 were excluded from the computation of diluted earnings per share because their effect would have been antidilutive. In addition, approximately 16.4 million and 11.4 million shares of common stock outstanding for the nine months ended June 30, 2011 and 2010, respectively, 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:
    as we have generated operating losses recently, additional operating losses may occur in the future and may be in excess of amounts that could be funded from operations, thus, we may be dependent upon external investment to support our operations during these periods;
 
    we will continue to be dependent upon positioning hardware 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, 2010, 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 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, increased competitive advantage and enhanced customer service.
Founded in 1985, Xata began providing fleet management solutions to the private fleet segment of the truck transportation industry. Xata currently addresses the private fleet segment through XataNet, its flagship software-as-a-service (SaaS) solution. With the acquisition of GeoLogic Solutions, Inc. in January of 2008, Xata expanded its solutions to include the MobileMax product line, 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, Inc. and Turnpike Global Technologies, LLC (combined Turnpike), a Personal Digital Assistant (PDA)-based fleet operations solution provider. Turnpike’s low-investment solution allows us to continue our growth strategy by expanding our addressable market to include any size fleet in North America and expanding into additional key vertical markets, such as Less Than Truckload (LTL), beverage and general freight.
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

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information about their fleets and transform that data into actionable intelligence. With the acquisition of Turnpike, Xata has relationships with additional customers such as Coca-Cola and Loblaws.
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 solutions.
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 software, hardware systems and services through the following solutions:
  o   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 works with a variety of in-cab communications devices and can also integrate with back-office applications.
 
  o   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.
 
  o   Xata Turnpike 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). Xata Turnpike interacts with various handheld devices using Bluetooth as a wireless in-cab communication medium. The information collected by Xata Turnpike 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 solutions 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.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) as set forth in the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the SEC. GAAP, as set forth within the ASC, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely, are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated

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financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our consolidated financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
    Revenue Recognition
 
    Allowance for Doubtful Accounts
 
    Goodwill and Intangible Assets — Impairment Assessments
 
    Product Warranties
 
    Accounting for Income Taxes
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Board of Directors. There were no changes to the Company’s critical accounting policies during the third quarter of fiscal 2011. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 2 of our Form 10-Q for the quarterly period ended December 31, 2010 and Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended September 31, 2010 for a more complete discussion of our critical accounting policies and estimates.

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Results of Operations for the three and nine months ended June 30, 2011 and 2010
The following table sets forth detail related to revenue, cost of goods sold, and gross margins:
                                 
    Three months ended June 30,     Nine Months Ended June 30,  
(Dollar amounts in thousands)   2011     2010     2011     2010  
Software
                               
Revenue
  $ 11,381     $ 11,042     $ 34,102     $ 31,508  
Cost of goods sold
    2,878       2,700       8,348       7,880  
 
                       
Gross margin
  $ 8,507     $ 8,342     $ 25,758     $ 23,628  
Gross margin %
    74.7 %     75.5 %     75.5 %     75.0 %
 
                               
Hardware systems
                               
Revenue
  $ 4,875     $ 5,362     $ 11,507     $ 17,142  
Cost of goods sold
    5,305       5,004       12,515       16,541  
 
                       
Gross margin
  $ (312 )   $ 358     $ (890 )   $ 601  
Gross margin %
    (8.8 %)     6.7 %     (8.8 %)     3.5 %
 
                               
Services
                               
Revenue
  $ 768     $ 984     $ 2,134     $ 3,213  
Cost of goods sold
    936       919       2,578       2,451  
 
                       
Gross margin
  $ (168 )   $ 65     $ (444 )   $ 762  
Gross margin %
    (21.9 %)     6.6 %     (20.8 %)     23.7 %
 
                               
Other
                               
Revenue
  $     $ 566     $     $ 1,719  
Cost of goods sold
          289       (21 )     797  
 
                       
Gross margin
  $     $ 277     $ 21     $ 922  
Gross margin %
    0.0 %     48.9 %     0.0 %     53.6 %
 
                               
Total
                               
Revenue
  $ 17,024     $ 17,954     $ 47,743     $ 53,582  
Cost of goods sold
    9,119       8,912       23,420       27,669  
 
                       
Gross margin
  $ 8,027     $ 9,042     $ 24,445     $ 25,913  
Gross margin %
    46.4 %     50.4 %     50.9 %     48.4 %
Revenue
Total revenue decreased 5.2 percent to $17.0 million for the three months ended June 30, 2011 compared to $18.0 million for the same period in fiscal 2010. Total revenue decreased 10.9 percent to $47.7 million for the nine months ended June 30, 2011 compared to $53.6 million for the same period in fiscal 2010.
Software revenue, including monthly subscriptions from the XataNet and Xata Turnpike solutions, monthly fees from the MobileMax solution and activation fees increased 3.1 percent to $11.4 million for the three months ended June 30, 2011 compared to $11.0 million for the same period in fiscal 2010 driven by growth of 4.2 percent and 51.1 percent for XataNet and Xata Turnpike, respectively. Software revenue for the three months ended June 30, 2011 represented 66.9 percent of total revenue compared to 61.5 percent for the same period of fiscal 2010. For the nine months ended June 30, 2011, software revenue increased 8.2 percent to comprise 71.4 percent of total revenue compared to 58.8 percent of total revenue for the same period in fiscal 2010.

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Hardware systems revenue, which includes hardware, warranty and repair revenue, decreased 9.1 percent to comprise 28.6 percent of total revenue for the three months ended June 30, 2011 compared to 29.9 percent for the same period in fiscal 2010. For the nine months ended June 30, 2011, hardware systems revenue decreased 32.9 percent to comprise 24.1 percent of total revenue compared to 32.0 percent for the same period in fiscal 2010. The decline in hardware systems revenue has been impacted by the transition to the next generation XataNet platform and continuing shift in the market to the Xata Turnpike solution.
Services revenue decreased 22.0 percent to comprise 4.5 percent of total revenue for the three months ended June 30, 2011 compared to 5.5 percent for the same period in fiscal 2010. Service revenue, which includes training, implementation, installation, and professional service revenue, was $2.1 million for the nine months ended June 30, 2011, which declined 33.6 percent compared to the same period in fiscal 2010 as a result of lower hardware systems activity.
Cost of Goods Sold and Gross Margin
Cost of software consists of communication, hosting costs, depreciation of Xata Turnpike RouteTracker units, and direct personnel costs related to network and infrastructure, as well as Xata Turnpike customer support. Cost of software increased 6.6 percent and 6.0 percent for the three and nine months ended June 30, 2011, respectively, compared to the same periods in fiscal 2010. Software gross margin decreased 0.8 percentage points and increased 0.5 percentage points for the three and nine months ended June 30, 2011, respectively, compared to the same periods in fiscal 2010. For the nine months ended June 30, 2011 the margin improvement was driven by the combination of an increased number of software subscriptions and continued reductions in communication costs.
Cost of hardware systems consists of the direct product costs, warranty costs, product repair costs, and direct personnel costs related to XataNet and MobileMax technical support. Cost of hardware systems increased 6.0 percent and decreased 24.4 percent for the three and nine months ended June 30, 2011, respectively, compared to the same periods in fiscal 2010. Hardware systems gross margins decreased 15.5 and 12.3 percentage points for the three and nine months ended June 30, 2011 compared to the same period in fiscal 2010 as a result of incremental hardware system costs associated with the initial rollout of the new XataNet platform and increased support and warranty costs as a percentage of revenue.
Cost of services consists of third party vendor costs and direct costs related to service personnel. Cost of services increased 1.8 percent and 5.2 percent for the three and nine months ended June 30, 2011, respectively, compared to the same periods in fiscal 2010. Service gross margins decreased 44.5 percentage points for the nine months ended June 30, 2011, compared to the same period in fiscal 2010. Service margins were impacted by a decrease in hardware systems activity and incremental costs associated with the initial rollout of the new XataNet platform.
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 for the three months ended June 30, 2011 were $5.8 million or 34.3 percent of revenue compared to $6.6 million or 36.9 percent of revenue for the same period in fiscal 2010. For the nine months ended June 30, 2011, selling, general and administrative expenses were $18.6 million or 39.0 percent of revenue compared to $19.7 million or 36.8 percent of revenue for the same period in fiscal 2010. For the nine months ended June 30, 2011 the decrease of $1.1 million compared to the prior reflects cost savings associated with the Turnpike acquisition.
Research & Development Expenses
Research and development expenses consist of employee salaries and expenses related to development of software and hardware systems. Research and development expenses were $2.7 million or 15.8 percent of revenue for the three months ended June 30, 2011 compared to $1.8 million or 9.8 percent of revenue for the comparable

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period in fiscal 2010. Research and development expenses were $7.2 million or 15.0 percent of revenue for the nine months ended June 30, 2011 compared to $4.7 million or 8.8 percent of revenue for the comparable period in fiscal 2010. The continued evolution of the compliance requirements facing the trucking industry warrant the Company’s additional investment in research and development in order to meet customers’ future needs.
Net Interest and Other Expense
Net interest and other expense was $0.1 million and $28,000 for the three months ended June 30, 2011 and 2010, respectively. Net interest and other expense was $0.3 million for the nine months ended June 30, 2011, a decrease of $0.1 million compared to $0.4 million for the comparable period in fiscal 2010. This decrease in net interest expense reflects lower debt levels following the accelerated payoff of certain debt facilities in February 2010.
Acquisition Related Costs
In connection with the acquisition of Turnpike, the Company incurred costs of $0.8 million for the nine months ended June 30, 2010. The Company expensed these costs as incurred as period costs. Similar charges were not incurred for the nine months ended June 30, 2011.
Interest Expense on Financing Activities
Interest expense on financing activities recorded for the nine months ended June 30, 2010 was approximately $1.4 million, which included interest related to the convertible debt of $0.9 million and the write off of the unamortized balance of prepaid financing fees of $0.5 million associated with the accelerated payoff of certain debt facilities. There was no interest expense on financing activities recorded for the nine months ended June 30, 2011.
Acquisition Related Interest and Mark to Market Expense
During the nine months ended June 30, 2010, the fair value of the common shares and contingent earn out were recorded as long term obligations and were re-measured at their fair value at the end of the period. Charges for this re-measurement were approximately $2,000 and $0.4 million for the three and nine months ended June 30, 2010, respectively. Similar charges were not incurred for the nine months ended June 30, 2011.
Income Taxes
An income tax benefit of $0.3 million was recorded for the three months and $0.5 million for the nine months ended June 30, 2011 to recognize tax benefits in Canada resulting from using net operating losses to offset the deferred tax liability. On a consolidated basis, the Company does not have objectively verifiable positive evidence of future taxable income and accordingly, we concluded that a valuation allowance is 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 currently estimated. At September 30, 2010, we had federal net operating loss carryforwards of approximately $38.3 million.
Net Loss to Common Shareholders
The Company incurred net losses to common shareholders of $0.5 million and a net income of $0.6 million for the three months ended June 30, 2011 and 2010, respectively, and net loss of $1.4 million and $3.3 million for the nine months ended June 30, 2011 and 2010, respectively. Net loss to common shareholders reflect preferred stock dividends and preferred stock deemed dividends of $32,000 and $0.1 million for the three months ended June 30, 2011 and 2010, respectively, and $0.1 million and $1.8 million for the nine months ended June 30, 2011 and 2010, respectively.

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Liquidity and Capital Resources
As of June 30, 2011, the Company held $15.2 million in cash and cash equivalents as compared to $13.4 million as of September 30, 2010. Our working capital, which is total current assets less total current liabilities, excluding the current portion of long-term obligations and deferred revenue and applicable deferred costs, remains strong at $16.7 million.
Operating activities provided cash of $4.9 million and $3.4 million during the nine months ended June 30, 2011 and 2010, respectively. Cash provided by operating activities increased by $1.5 million compared to the same period in fiscal 2010 due to positive changes in components of working capital, primarily a decrease in accounts receivable and an increase in accrued expenses.
Cash used in investing activities was $2.3 million and $2.0 million for the nine months ended June 30, 2011 and 2010, respectively, as the result of planned fixed asset expenditures. In fiscal 2010, the Company also invested $9.5 million in the acquisition of Turnpike.
Cash used by financing activities of $0.9 million for the nine months ended June 30, 2011 primarily reflected payments of capital lease obligations for Xata Turnpike RouteTracker units. Fiscal 2010 payments on long-term borrowing reflect capital lease payments of $0.3 million and the accelerated payoff of certain debt facilities and related charges of $8.3 million.
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 the Company has 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 nine months ended June 30, 2011 and 2010, 84,000 and 81,000 shares, respectively, of Series B Preferred Stock have been issued for payment of accrued dividends.
Recently Issued Accounting Standards
See Note 1 in the Notes to Consolidated Financial Statements located in Part I, Item 1 of this Report.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting
Our principal executive officer and principal financial officer, or persons performing similar functions, carried out an evaluation of the effectiveness, as of June 30, 2011, of the design and operation of our disclosure controls and procedures (as defined in Exchange Rule 13a-15(e)) and 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 our principal executive officer and principal financial officer as appropriate 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.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
     None
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, 2010, 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. Reserved
Item 5. Other Information.
     None
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
 
  101   The following materials from Xata Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations for the three and nine months ended June 30, 2011 and 2010, (ii) the Consolidated Balance Sheets as of June 30, 2011 and September 30, 2010, (iii) the Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended June 30, 2011 and the twelve months ended September 30, 2010, (iv) the Consolidated Statements of Cash Flows for the nine months ended June 30, 2011 and 2010, and (v) Notes to Consolidated Financial Statements.

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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: August 5, 2011  Xata Corporation
(Registrant)
 
 
  by:     /s/ Scott G. Christian    
    Scott G. Christian   
    Chief Financial Officer
(Signing as Principal Financial and Accounting Officer,
and as Authorized Signatory of Registrant) 
 
 

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