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EX-32.1 - EX-32.1 - XRS Corp | c62785exv32w1.htm |
EX-31.1 - EX-31.1 - XRS Corp | c62785exv31w1.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended December 31, 2010 or
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 0-27166
XATA Corporation
(Exact Name of Registrant as Specified in its Charter)
Minnesota | 41-1641815 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
965 Prairie Center Drive, Eden Prairie, Minnesota 55344
(Address of Principal Executive Offices) (Zip Code)
Registrants telephone number, including area code: (952) 707-5600
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
APPLICABLE ONLY TO CORPORATE ISSUERS
As of January 25, 2011, the following securities of the Registrant were outstanding: 10,626,404
shares of Common Stock, $.01 par value per share, 2,126,362 shares of Series B Preferred Stock,
1,269,036 shares of Series C Preferred Stock, 1,566,580 shares of Series D Preferred Stock, 1,355,857 of Series F Preferred Stock and 10,066,663
shares of Series G Preferred Stock.
XATA Corporation
Index
Index
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
XATA Corporation
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended | ||||||||
December 31, | ||||||||
In thousands, except per-share data | 2010 | 2009 | ||||||
Revenue |
$ | 13,978 | $ | 17,523 | ||||
Costs and expenses |
||||||||
Cost of goods sold |
5,658 | 9,692 | ||||||
Selling, general and administrative |
6,113 | 6,150 | ||||||
Research and development |
2,224 | 1,333 | ||||||
Acquisition related costs |
| 779 | ||||||
Total costs and expenses |
13,995 | 17,954 | ||||||
Operating loss |
(17 | ) | (431 | ) | ||||
Net interest and other expense |
(83 | ) | (276 | ) | ||||
Interest expense on financing activities |
| (779 | ) | |||||
Acquisition related interest and mark to market |
| (162 | ) | |||||
Loss before income taxes |
(100 | ) | (1,648 | ) | ||||
Income tax benefit |
(15 | ) | | |||||
Net loss |
(85 | ) | (1,648 | ) | ||||
Preferred stock dividends |
(53 | ) | (51 | ) | ||||
Preferred stock deemed dividends |
18 | (14 | ) | |||||
Net loss to common shareholders |
$ | (120 | ) | $ | (1,713 | ) | ||
Net loss per common share: |
||||||||
Basic and diluted |
$ | (0.01 | ) | $ | (0.20 | ) | ||
Weighted average common and
common share equivalents: |
||||||||
Basic and diluted |
9,740 | 8,646 |
The accompanying notes are an integral part of the consolidated financial statements (unaudited).
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Table of Contents
XATA Corporation
Consolidated Balance Sheets (Unaudited)
December 31, | September 30, | |||||||
In thousands | 2010 | 2010 | ||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 14,030 | $ | 13,374 | ||||
Accounts receivable, less allowances
of $273 at December 31, 2010 and $444 at September 30, 2010 |
6,493 | 11,392 | ||||||
Inventories |
4,107 | 3,047 | ||||||
Deferred product costs |
1,875 | 2,042 | ||||||
Prepaid expenses and other current assets |
1,134 | 1,260 | ||||||
Total current assets |
27,639 | 31,115 | ||||||
Equipment, leased equipment and leasehold improvements, net |
6,651 | 5,798 | ||||||
Intangible assets, net |
14,417 | 14,901 | ||||||
Goodwill |
17,525 | 17,048 | ||||||
Deferred product costs, net of current portion |
1,491 | 1,757 | ||||||
Deferred tax assets |
348 | 337 | ||||||
Other assets |
410 | 420 | ||||||
Total assets |
$ | 68,481 | $ | 71,376 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Current portion of debt obligations |
$ | 973 | $ | 839 | ||||
Accounts payable |
3,842 | 5,138 | ||||||
Accrued expenses |
3,917 | 4,872 | ||||||
Deferred revenue |
3,878 | 5,070 | ||||||
Total current liabilities |
12,610 | 15,919 | ||||||
Debt obligations, net of current portion |
688 | 485 | ||||||
Deferred revenue, net of current portion |
2,976 | 3,591 | ||||||
Deferred tax liabilities |
2,317 | 2,242 | ||||||
Other long-term liabilities |
592 | 638 | ||||||
Total liabilities |
19,183 | 22,875 | ||||||
Shareholders equity |
||||||||
Preferred stock, no par, 50,000 shares authorized: |
||||||||
Series B, 4% convertible, 2,250 shares designated;
shares issued and outstanding: 2,127 at December 31, 2010
and 2,085 at September 30, 2010 |
5,121 | 5,033 | ||||||
Series C, convertible, 1,400 shares designated;
shares issued and outstanding: 1,269 at December 31, 2010
and September 30, 2010 |
4,426 | 4,426 | ||||||
Series D, convertible, 1,600 shares designated;
shares issued and outstanding: 1,567 at December 31, 2010
and September 30, 2010 |
5,279 | 5,279 | ||||||
Series F, convertible, 1,400 shares designated;
shares issued and outstanding: 1,356 at December 31, 2010
and September 30, 2010 |
2,365 | 2,365 | ||||||
Series G, convertible, 10,100 shares designated;
shares issued and outstanding: 10,067 at December 31, 2010
and September 30, 2010 |
26,877 | 26,877 | ||||||
Common stock, par value $0.01 per share; 100,000 shares
authorized; shares issued and outstanding: 10,626 at
December 31, 2010 and 9,816 at September 30, 2010 |
106 | 98 | ||||||
Contingent common stock earn-out |
4,062 | 6,452 | ||||||
Additional paid-in capital |
44,126 | 41,539 | ||||||
Accumulated deficit |
(44,249 | ) | (44,129 | ) | ||||
Accumulated other comprehensive income |
1,185 | 561 | ||||||
Total shareholders equity |
49,298 | 48,501 | ||||||
Total liabilities and shareholders equity |
$ | 68,481 | $ | 71,376 | ||||
The accompanying notes are an integral part of the consolidated financial statements (unaudited).
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Table of Contents
XATA Corporation
Consolidated Statements of Changes in Shareholders Equity (Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series B | Series C | Series D | Series F | Series G | Contingent | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Common Stock | Paid-In | Accumulated | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In thousands | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Earn-Out | Capital | Deficit | Income | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2009 |
2,004 | $ | 4,790 | 1,269 | $ | 4,426 | 1,567 | $ | 5,279 | 1,356 | $ | 2,365 | | $ | | 8,789 | $ | 88 | $ | | $ | 32,536 | $ | (40,919 | ) | $ | | $ | 8,565 | |||||||||||||||||||||||||||||||||||||||
Stock based compensation |
| | | | | | | | | | | | | 1,210 | | | 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 |
2,085 | 5,033 | 1,269 | 4,426 | 1,567 | 5,279 | 1,356 | 2,365 | 10,067 | 26,877 | 9,816 | 98 | 6,452 | 41,539 | (44,129 | ) | 561 | 48,501 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation |
| | | | | | | | | | | | | 205 | | | 205 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Contingent common stock earn-out |
| | | | | | | | | | 810 | 8 | (2,390 | ) | 2,382 | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends |
42 | 106 | | | | | | | | | | | | | (53 | ) | | 53 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock deemed dividends |
| (18 | ) | | | | | | | | | | | | | 18 | | | ||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
624 | 624 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss |
(85 | ) | (85 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income |
539 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 |
2,127 | $ | 5,121 | 1,269 | $ | 4,426 | 1,567 | $ | 5,279 | 1,356 | $ | 2,365 | 10,067 | $ | 26,877 | 10,626 | $ | 106 | $ | 4,062 | $ | 44,126 | $ | (44,249 | ) | $ | 1,185 | $ | 49,298 | |||||||||||||||||||||||||||||||||||||||
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 Three Months Ended December 31, | ||||||||
In thousands | 2010 | 2009 | ||||||
Operating activities |
||||||||
Net loss |
$ | (85 | ) | $ | (1,648 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
||||||||
Depreciation and amortization of intangibles |
1,440 | 935 | ||||||
Amortization of debt financing costs |
| 458 | ||||||
Non-cash interest expense on convertible debt |
| 313 | ||||||
Non-cash charges for issuance of equity securities related to the
acquisition of Turnpike Global Technologies |
| 162 | ||||||
Stock based compensation |
205 | 287 | ||||||
Changes in assets and liabilities, net of impact of acquisition: |
||||||||
Accounts receivable, net |
4,932 | (1,941 | ) | |||||
Inventories |
(1,011 | ) | 964 | |||||
Deferred product costs |
433 | 80 | ||||||
Prepaid expenses and other assets |
101 | 418 | ||||||
Accounts payable |
(1,728 | ) | (1,322 | ) | ||||
Accrued expenses |
(973 | ) | (1,366 | ) | ||||
Deferred revenue |
(1,807 | ) | (685 | ) | ||||
Net cash provided by (used in) operating activities |
1,507 | (3,345 | ) | |||||
Investing activities |
||||||||
Purchase of equipment and leasehold improvements |
(553 | ) | (381 | ) | ||||
Acquisition of Turnpike Global Technologies, net of cash acquired |
| (9,451 | ) | |||||
Net cash used in investing activities |
(553 | ) | (9,832 | ) | ||||
Financing activities |
||||||||
Borrowings on long-term obligations, net of costs |
| 30,200 | ||||||
Payments on long-term obligations |
(342 | ) | (8,636 | ) | ||||
Payments on financing costs |
| (75 | ) | |||||
Net cash (used in) provided by financing activities |
(342 | ) | 21,489 | |||||
Effects of exchange rate on cash |
44 | 2 | ||||||
Increase in cash and cash equivalents |
656 | 8,314 | ||||||
Cash and cash equivalents |
||||||||
Beginning |
13,374 | 3,440 | ||||||
Ending |
$ | 14,030 | $ | 11,754 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash payments for interest |
$ | 40 | $ | 1,171 | ||||
Supplemental schedule of noncash investing and financing activities |
||||||||
Assets acquired under capital lease obligation |
$ | 679 | $ | 10 | ||||
Preferred stock deemed dividends |
$ | (18 | ) | $ | 14 | |||
Preferred stock dividends |
$ | 53 | $ | 51 | ||||
Preferred stock dividends paid |
$ | 106 | $ | 102 | ||||
Issuance of shares for settlement of contingent earn-out |
$ | 2,390 | $ | |
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)
(Dollars in thousands)
Note 1. Significant Accounting Policies
Presentation
The accompanying unaudited consolidated financial statements were prepared by XATA Corporation (the
Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for
interim financial statements. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures made herein are adequate to make the
information presented not misleading.
In the opinion of management, the consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present the financial
condition, results of operations, and cash flows for the periods presented. Results of operations
for the periods presented are not necessarily indicative of results to be expected for any other
interim period or for the full year. These consolidated financial statements should be read in
conjunction with the Companys financial statements and notes thereto in its Form 10-K for the year
ended September 30, 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 products 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 products functionality. The adoption of the above referenced guidance had no 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 XATANET and Turnpike solutions, and monthly fees from the MobileMax solution; (2) hardware
systems, which includes hardware, warranty, repair, and activation 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 Companys
direct-sales include sales of the Companys solutions primarily to fleet operators and logistics
providers. The Companys channel sales are driven from Company personnel working in tandem with
partners to sell the Companys products to fleets of all sizes and types.
The Companys XATANET customers typically enter into multi-year agreements with automatic renewal
features. XATANET 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 Turnpike customers operated under month-to-month
contracts and were allowed to provide a 30-day termination notice. However, beginning in the latter
half of fiscal 2010 Turnpike direct customer contract renewals were for a minimum of a one-year
term, with an automatic one-year renewal period. Similar to XATANET customers, under the new
contracts, Turnpike 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.
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 have been
transferred. For most of the Companys 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 that include tangible products that contain software that is
essential to the tangible products functionality and undelivered software elements that relate to
the tangible products 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 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
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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 doesnt exist, ESP is determined for the purposes of allocating the arrangement by
considering several external and internal 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 Companys go-to-market
strategy. As the Companys 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 Companys 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 software component of the Companys XATANET and Turnpike solutions, functions together with the
hardware system component to deliver the solutions functionality. As a result, the Company has
identified two deliverables in arrangements involving the sale of these solutions. The first
deliverable is the hardware system component. The second deliverable is the hosting of the software
essential to the functionality of the hardware system, which is provided by the Company (referred
to throughout this document as software). The Company has allocated revenue between these two
deliverables using the relative selling price method. The Company maintains VSOE for the software
deliverable and TPE for the hardware system deliverable. As such, the allocation of revenue has
been based on the available information. Amounts allocated to the delivered hardware system are
recognized at the time of sale provided the other conditions for revenue recognition have been met.
Amounts allocated to essential solution software are deferred and recognized on a straight-line
basis over the term of the agreement with the customer.
Revenue Recognition for Software Products
The Company accounts for multiple element arrangements that consist only of software or
software-related products, which include the Companys MobileMax solution, 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 Companys software arrangements include services, such as implementation, installation,
driver and education and consulting services sold separately under engagement contracts and are
included as a part of the Companys services business. Revenues from these arrangements are
generally 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 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
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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
Companys accounts receivable are due from companies with fleet trucking operations in a variety of
industries. Credit is extended based on an evaluation of a customers financial condition.
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
Companys previous loss history, the customers current ability to pay its obligation, and the
condition of the general economy and the industry as a whole. The Company reserves for these
accounts receivable by increasing bad debt expense when they are determined to be uncollectible.
Payments subsequently received, or otherwise determined to be collectible, are treated as
recoveries that reduce bad debt expense.
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 FASBs
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
consider 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 assets
or liabilitys 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 Companys 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 balances, on a recurring basis as of December 31, 2010 and September
30, 2010:
Money market funds The Company maintained money market funds of $13.6 million and $13.0 million
as of December 31, 2010 and September 30, 2010, respectively. The valuation techniques used to
measure the fair values of the Companys 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 three months ended December 31,
2010.
Contingent earn out liability The Company recorded a contingent earn out liability of $0.1
million and $0.2 million as of December 31, 2010 and September 30, 2010, respectively. The
Companys 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 has been summarized
in the rollforward below:
Balances as of September 30, 2010 |
$ | 181 | ||
Payments of earn out |
(70 | ) | ||
Balance as of December 31, 2010 |
$ | 111 | ||
Inventories
Inventories consist of finished goods which are stated at the lower of cost or market. Cost is
determined on the average cost method, which approximates the first-in, first-out method.
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Equipment, Leased Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of:
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
Office furniture and equipment |
$ | 5,764 | $ | 5,558 | ||||
Leased equipment |
3,605 | 2,959 | ||||||
Engineering and manufacturing equipment |
902 | 919 | ||||||
Leasehold improvements |
3,239 | 2,452 | ||||||
13,510 | 11,888 | |||||||
Less: accumulated depreciation |
(6,859 | ) | (6,090 | ) | ||||
Equipment and leasehold improvements, net |
$ | 6,651 | $ | 5,798 | ||||
Total depreciation expense included in selling, general and administrative expenses in the
consolidated statements of operations was approximately $0.5 million and $0.3 million for the three
months ended December 31, 2010 and 2009, respectively. Depreciation on leased Turnpike equipment is
recorded as cost of goods sold and was $0.3 million and $0.1 million for the three months ended
December 31, 2010 and 2009, respectively.
Capitalized Software Development Costs
Hardware system development costs incurred after establishing technological feasibility are
capitalized as capitalized hardware system development costs in accordance with Statement of ASC
350-40-35 Internal-Use Computer Software Marketed Costs that are capitalized are amortized to
cost of goods sold beginning when the product is first released for sale to the general public.
Amortization is at the greater of the amount computed using the ratio of current gross revenues for
the product to the total of current and anticipated future gross revenues or the straight-line
method over the estimated economic life of the product (two to five years). As of December 31, 2010
and September 30, 2010, there was $0.4 million of capitalized development costs.
Product development costs that do not meet the capitalization criteria of ASC 985-20 are charged to
research and development expense as incurred.
Intangible Assets
Intangible assets subject to amortization were as follows as of December 31, 2010:
Foreign | ||||||||||||||||||||
Weighted | Currency | |||||||||||||||||||
Average Life | Accumulated | Translation | ||||||||||||||||||
(years) | Cost | Amortization | Adjustment | Net | ||||||||||||||||
Acquired customer
contracts |
7.8 | $ | 14,900 | $ | (5,182 | ) | $ | 81 | $ | 9,799 | ||||||||||
Acquired technology |
7.0 | 2,700 | (430 | ) | 159 | 2,429 | ||||||||||||||
Reseller relationships |
6.0 | 1,500 | (279 | ) | 86 | 1,307 | ||||||||||||||
Trademark |
10.0 | 900 | (100 | ) | 54 | 854 | ||||||||||||||
Other intangibles |
7.0 | 49 | (21 | ) | | 28 | ||||||||||||||
Total |
7.7 | $ | 20,049 | $ | (6,012 | ) | $ | 380 | $ | 14,417 | ||||||||||
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Amortization expense was $0.7 million and $0.5 million for the three months ended December 31, 2010
and 2009, respectively.
Future amortization expense, as of December 31, 2010, is expected to be as follows:
Years ending September 30, | ||||
2011 |
$ | 2,036 | ||
2012 |
2,715 | |||
2013 |
2,715 | |||
2014 |
2,715 | |||
2015 |
2,710 | |||
Thereafter |
1,526 | |||
Total expected amortization expense |
$ | 14,417 | ||
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.
Although the Company has recorded net losses to common shareholders, it demonstrated the ability to
generate cash from operations. The Company has evaluated these results and concluded that no
indicators of impairment exist.
Goodwill
The changes in the net carrying amount of goodwill for the three months ended December 31, 2010 are
as follows:
Balance at September 30, 2010 |
$ | 17,048 | ||
Foreign currency translation adjustment |
477 | |||
Balance at December 31, 2010 |
$ | 17,525 | ||
As of December 31, 2010, the Company had a goodwill balance of $17.5 million of which $13.7 million
resulted from the Companys 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 Companys chief operations 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 Companys market
capitalization with the carrying value of its net assets. If the Companys 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.
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Historically, the Companys 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 Companys most
recent annual assessment performed on the first day of the fourth quarter of fiscal 2010 did not
indicate any impairment of its goodwill.
Although the Company has recorded net losses to common shareholders, it demonstrated the ability to
generate cash from operations. The Company has evaluated these results and concluded that no
indicators of impairment exist.
The recording of net losses to common shareholders does not indicate to the Company that there has
been a significant and permanent decline in the Companys operations whereby its goodwill would be
impaired. However, the Company will continue to monitor and evaluate the carrying value of its
goodwill
Product Warranties
The Company sells its products with a limited warranty. The Company provides for estimated
warranty costs in relation to the recognition of the associated revenue. Factors affecting the
Companys product warranty liability include the number of units sold, historical and anticipated
rates of claims and cost per claim. The Company periodically assesses the adequacy of its product
warranty liability based on changes in these factors.
At December 31, 2010 and September 30, 2010, the Company had accruals for product warranties of
approximately $0.9 million and $1.0 million, respectively. These amounts are included in accrued
expenses on the Companys balance sheet.
Shipping Costs
Shipping costs, which are classified as a component of cost of goods sold, were approximately $0.1
million for each of the three months ended December 31, 2010 and 2009, respectively. Customer
billings related to shipping and handling fees are reported as hardware systems revenue.
Advertising Costs
Advertising costs consist primarily of ad campaigns, catalog brochures, promotional items and trade
show expenses and are expensed as incurred. Advertising costs, which are included in selling,
general and administrative expenses, were $0.3 million for the three months ended December 31, 2010
and 2009, respectively.
Income taxes
The Company accounts for income taxes following the provisions of ASC 740-10 Income Taxes -
Overall. ASC 740-10 requires that deferred income taxes be recognized for the future tax
consequences associated with differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end, based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect taxable earnings.
Valuation allowances are established by the Company when necessary to reduce deferred tax assets to
the amount more likely than not to be realized. The effect of changes in tax rates is recognized in
the period in which the rate change occurs.
Recently Issued Accounting Standards
Performing Step 2 of the Goodwill Impairment Test: In December 2010, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update No. 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). 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
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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 January 2010, the FASB issued
Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (Topic
820)Fair Value Measurements and Disclosures (ASU 2010-06), to add additional disclosures about
the different classes of assets and liabilities measured at fair value, the valuation techniques
and inputs used, and the activity in Level 3 fair value measurements. This ASU also clarifies the
existing fair value disclosures regarding the level of disaggregation and the valuation techniques
and inputs used to measure fair value. ASU No. 2010-06 only impacts disclosures and was effective
for interim and annual reporting periods beginning after December 15, 2009, except for the
disclosures on purchases, sales, issuances and settlements in the roll-forward of activity for
Level 3 fair value measurements. Refer to the additional disclosures included above as a result of
the Companys adoption of ASU 2010-06.
Note 2. Revenue and Cost of Goods Sold Information
The Company operates and manages the business as one reportable segment. Factors used to identify
the single operating segment include the financial information available for evaluation by the
chief operating decision maker in making decisions about how to allocate resources and assess
performance. For the three months ended December 31, 2010 and 2009, the Company reported the
following revenues and related cost of goods sold by type:
For the Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Revenue: |
||||||||
Software |
$ | 11,341 | $ | 9,676 | ||||
Hardware systems |
1,733 | 6,197 | ||||||
Services |
904 | 1,090 | ||||||
Other |
| 560 | ||||||
Total revenue |
$ | 13,978 | $ | 17,523 | ||||
For the Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Cost of goods sold: |
||||||||
Software |
$ | 2,773 | $ | 2,390 | ||||
Hardware systems |
2,041 | 6,309 | ||||||
Services |
865 | 744 | ||||||
Other |
(21 | ) | 249 | |||||
Total cost of goods sold |
$ | 5,658 | $ | 9,692 | ||||
Software revenue includes monthly subscriptions from XATANET and Turnpike solutions, and monthly
fees from MobileMax solution. Hardware systems revenue includes hardware, warranty, repair, and
activation revenue. Services revenue includes training, implementation, installation, and
professional service revenue.
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Cost of software consists of communication, hosting costs, and direct personnel costs related to
network, infrastructure, and 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. Turnpike Global Technologies, Inc. and Turnpike Global Technologies LLC Acquisition
On December 4, 2009, the Company acquired all of the outstanding equity of Turnpike for a purchase
price at closing consisting of $10.0 million in cash and 833,333 shares of common stock of the
Company. Additionally, the Company committed to pay total earn-outs up to an additional 2,500,000
shares of common stock upon achievement by Turnpike of certain performance goals for 2010, 2011,
and 2012 fiscal years. All share related activity required shareholder approval. On February 17,
2010 the Companys shareholders approved the transaction and common shares totaling 809,993 were
issued to the shareholders of Turnpike, with the value of the remaining 23,340 shares being settled
in cash of $70,000 to non-accredited U.S. holders. Prior to shareholder approval, the fair value of
the common shares and contingent earn out was recorded as long term obligations of the Company with
periodic re-measurement of fair value. The imputed interest on the common shares and the mark to
market adjustment for the earn-outs has been shown as Acquisition related interest and mark to
market on the statement of operations.
In connection with financing the acquisition of Turnpike, the Company issued convertible debt
totaling $30.2 million. The convertible debt was converted into 10,066,663 shares of Series G
preferred stock and warrants to purchase 3,019,995 common shares (with an exercise price of $3.00
per share) on February 19, 2010, subsequent to shareholder approval. The convertible debt carried
an interest rate of 14% per annum. The Company used proceeds from the convertible debt for the
purchase of Turnpike, payment of transaction costs, pay off of the term loan with Partners for
Growth II, L.P. (PFG) of $8.0 million and to pay a litigation settlement. The remaining proceeds
are being utilized for working capital needs and future growth. The interest on the convertible
debt while it was outstanding has been included in Interest expense on financing activities on
the statement of operations.
The components of the purchase price and the allocation to the assets and liabilities based on
their estimated fair values at the date of acquisition are as follows:
Cash |
$ | 10,000 | ||||||
Stock (1) |
2,477 | |||||||
Earn-Out (2) |
6,297 | |||||||
Total purchase price |
$ | 18,774 | ||||||
Cash |
$ | 548 | ||||||
Accounts receivable, less allowances for doubtful accounts |
943 | |||||||
Prepaid expenses |
348 | |||||||
Equipment and leasehold improvements, net |
1,419 | |||||||
Deferred tax asset |
328 | |||||||
Accounts payable |
(609 | ) | ||||||
Accrued expenses |
(510 | ) | ||||||
Deferred tax liabilities |
(2,177 | ) | ||||||
Capital lease obligations |
(1,681 | ) | ||||||
Net liabilities |
(1,391 | ) | ||||||
Acquired customer contracts and other intangible assets, net (3) |
6,500 | |||||||
Goodwill |
13,665 | |||||||
Total |
$ | 18,774 | ||||||
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(1) | Stock amount calculated using the fair market value on the date of acquisition based on the present value of the 833,333 shares of common stock at a stated value of $3.00. | |
(2) | Earn-out potential of an additional 833,333 shares of common stock after the end of each of the 2010, 2011, and 2012 fiscal years. The amount was calculated using the estimated fair market value on the date of acquisition based on stock price and estimated probability of earn-out target achievements. | |
(3) | Intangible assets: |
Fair Value | Est. Useful Life | |||||
Acquired customer contracts |
$ | 1,400 | 6 years | |||
Acquired technology |
2,700 | 7 years | ||||
Reseller relationships |
1,500 | 6 years | ||||
Trademark |
900 | 10 years | ||||
Total intangible assets |
$ | 6,500 | ||||
The following unaudited pro forma results of operations are presented to illustrate the
estimated effects of the Companys equity raise and acquisition of Turnpike on the Companys
historical results of operations. The pro forma adjustments are based on the information available
at the time of the preparation of this document. The unaudited pro forma consolidated results of
operations are for comparative purposes only and are not necessarily indicative of results that
would have occurred had the acquisition been consummated as of the beginning of the periods
presented, nor are they necessarily indicative of future results.
Unaudited pro forma results of operations for the three months ended December 2009, as if the
equity raise, debt pay offs, acquisition of Turnpike, shareholder approval, and conversion of the
convertible debt and related beneficial conversion all occurred at the beginning of the period is
as follows (in thousands, except per share amounts):
Revenue |
$ | 19,178 | ||
Net loss to common shareholders |
$ | (3,222 | ) | |
Net loss per common share basic and diluted |
$ | (0.34 | ) | |
Weighted average common and common share equivalents basic and diluted |
9,479 |
Note 4. Stock-Based Compensation
In February 2007, the Company adopted the 2007 Long Term Incentive and Stock Option Plan (the 2007
Plan). The 2007 Plan permits the granting of incentive stock options meeting the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified options that do not
meet the requirements of Section 422. Stock appreciation rights, restricted stock awards, and
restricted stock units may also be granted under the 2007 Plan. A total of 500,000 shares of the
Companys common stock were originally reserved for issuance pursuant to equity awards under the
2007 Plan. Subsequently, 1,000,000 shares were approved for addition to the 2007 Plan at the 2009
Annual Shareholders Meeting. The 2007 Plan has an evergreen provision in
which the maximum number of shares that may be issued under the 2007 Plan shall be cumulatively
increased on January 1, 2008 and on each January 1 thereafter for nine years by the lesser of (i)
500,000 Common Shares, (ii) 3% of the Companys outstanding Common Shares, on an as-converted
basis, as of the preceding December 31 and (iii) a number of Common Shares determined by the Board
or Committee. The Company has 744,620 shares authorized and available for future equity awards as
of December 31, 2010.
Stock Options
The Company accounts for share-based employee compensation plans under the provisions of ASC 718
Compensation Stock Compensation, which requires the measurement and recognition of compensation
expense for all share-based payment awards to employees and directors based on estimated fair
values.
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The fair value of each option is estimated at the grant date using the Black-Scholes option-pricing
model. 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 table for the three months ended December 31, 2009
(number of shares in thousands):
Number of shares granted |
420 | |||
Fair value per share |
$ | 1.31 | ||
Risk-free interest rate |
3.05 | % | ||
Expected volatility |
42.70 | % | ||
Expected life (in years) |
6.00 | |||
Dividend yield |
|
The Company estimates the volatility of the common stock at the date of grant based on a historical
volatility rate, consistent with ASC 718. The decision to use historical volatility was based upon
the lack of traded common stock options. The expected term is estimated consistent with the
simplified method, as identified in ASC 718-10 Compensation Stock Compensation Overall, for
share-based awards granted during fiscal 2010. The simplified method calculates the expected term
as the average of the vesting and contractual terms of the award. The risk-free interest rate
assumption is based on observed interest rates appropriate for the term of the options. The Company
uses historical data to estimate pre-vesting option forfeitures and records share-based
compensation expense only for those awards that are expected to vest. The fair value of options
are amortized over the vesting period of the awards utilizing a straight-line method.
The following table summarizes information relating to stock option activity for fiscal 2010 and
for the three month period ended December 31, 2010 (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 | ||||||
Cancelled: |
||||||||
Expired |
(27 | ) | 3.09 | |||||
Forfeited |
(93 | ) | 3.35 | |||||
Options outstanding at December 31, 2010 |
2,107 | $ | 3.59 | |||||
There were no options granted or exercised during the three months ended December 31, 2010. The
intrinsic value of stock options outstanding and stock options outstanding and exercisable as of
December 31, 2010 was $0.3 million and $0.1 million, respectively.
On December 19, 2008, pursuant to and in accordance with the recommendation of the Compensation
Committee (the Committee) of the Board of Directors of the Company, the Company extended the
expiration date of all employee stock options previously issued under the 2007 Long-Term Incentive
and Stock Option Plan and the
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2002 Long-Term Incentive and Stock Option Plan from five years to ten
years. No changes were made to any other terms of the stock options and the exercise prices
remained the same. The total impact of this modification is that an additional $75,000 of
compensation cost is being recognized ratably over the remaining vesting periods of the modified
options.
Information regarding options outstanding and exercisable at December 31, 2010 is as follows
(number of shares in thousands):
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted | ||||||||||||||||||||||||
Weighted | Average | |||||||||||||||||||||||
Average | Weighted | Remaining | Weighted | |||||||||||||||||||||
Number | Remaining | Average | Number | Contractual | Average | |||||||||||||||||||
Range of | of | Contractual | Exercise | of | Life | Exercise | ||||||||||||||||||
exercise price | Shares | Life (Years) | Price | Shares | (Years) | Price | ||||||||||||||||||
$2.00 - $2.99 |
1,161 | 8.2 | $ | 2.48 | 500 | 8.0 | $ | 2.52 | ||||||||||||||||
3.00 - 3.99 |
141 | 8.1 | 3.47 | 113 | 8.0 | 3.51 | ||||||||||||||||||
4.33 - 4.98 |
35 | 5.6 | 4.64 | 35 | 5.6 | 4.64 | ||||||||||||||||||
5.03 - 5.40 |
770 | 5.9 | 5.24 | 770 | 5.9 | 5.24 | ||||||||||||||||||
2,107 | 7.3 | 3.59 | 1,418 | 6.8 | 4.13 | |||||||||||||||||||
As of December 31, 2010, there was approximately $0.7 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 0.7 years.
Restricted Stock Awards
The Company grants restricted shares of common stock as part of its long-term incentive
compensation to employees. Fair market values of restricted stock awards are determined based on
the closing market price on the date of grant. Restricted stock awards vest over one to three
years and stock may be sold once vested. Restricted stock awards granted to directors vest
immediately.
The following table summarizes information relating to restricted stock activity for fiscal 2010
and for the three month period ended December 31, 2010 (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 | ||||||
Vested |
(26 | ) | 4.05 | |||||
Restricted stock outstanding at December 31, 2010 |
52 | $ | 3.92 | |||||
The total fair value of shares vested was $0.1 million for each of the three months ended December
31, 2010 and 2009, respectively. There were no restricted stock awards granted during the three
months ended December 31, 2010.
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At December 31, 2010, there was approximately $0.2 million of total unrecognized compensation costs
related to restricted stock awards. The Company will recognize this cost over the remaining
vesting periods of these awards. The weighted average period over which the costs will be
recognized is 0.5 years.
Restricted Stock Units
The Company currently grants restricted units of common stock as part of its long-term incentive
compensation to employees. The fair value of restricted stock units is determined based on the
closing market price of the Companys stock on the date of grant. Restricted stock units vest over
a period of three years for employees.
The following table summarizes information relating to restricted stock unit activity for fiscal
2010 and the three month period ended December 31, 2010 (number of units in thousands):
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Restricted stock outstanding at September 30, 2009 |
241 | 2.00 | ||||||
Granted |
174 | 2.87 | ||||||
Settled |
(201 | ) | 2.20 | |||||
Cancelled: |
||||||||
Forfeited |
(29 | ) | 2.31 | |||||
Restricted stock outstanding at September 30, 2010 |
185 | $ | 2.55 | |||||
Cancelled: |
||||||||
Forfeited |
(17 | ) | 2.44 | |||||
Restricted stock outstanding at December 31, 2010 |
168 | $ | 2.56 | |||||
There were no restricted stock units granted during the three months ended December 31, 2010. The
total fair value of restricted stock units vested during the three months ended December 31, 2010
was $0.5 million.
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 Companys
outstanding restricted stock units. As a result of this acceleration, the Company recognized a
charge of $0.2 million.
At December 31, 2010, there was approximately $0.5 million of total unrecognized compensation costs
related to restricted stock units. The Company will recognize this cost over the remaining vesting
periods of these units. The weighted average period over which the costs will be recognized is 0.7
years.
Note 5. Commitments
Leases
The Company leases its offices, warehouse, and certain office equipment under noncancelable
operating leases, which generally have escalating rentals over the term of the lease. The facility
leases require that the Company pay a portion of the real estate taxes, maintenance, utilities and
insurance.
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Approximate future minimum rental commitments, excluding common area costs under these
non-cancelable operating leases, as of December 31, 2010 are:
Years ending September 30, | ||||
2011 |
$ | 549 | ||
2012 |
569 | |||
2013 |
541 | |||
2014 |
551 | |||
2015 |
147 | |||
Thereafter |
| |||
Total |
$ | 2,357 | ||
Rental expense, including common area costs, was $0.3 million and $0.4 million for the three months
ended December 31, 2010 and 2009, respectively.
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
employees contribution for employee deferrals of up to 6% of their compensation. Matching
contributions were $0.1 million for the three months ended December 31, 2010 and 2009.
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 December 31, 2010 the Company believes that all
commitments made will be achieved over the terms established.
Note 6. Financing Arrangements
Debt obligations consist of the following:
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
Capitalized leases |
$ | 1,550 | $ | 1,143 | ||||
Contingent earn out |
111 | $ | 181 | |||||
Total debt obligations |
1,661 | 1,324 | ||||||
Less current portion of debt obligations |
973 | 839 | ||||||
Total debt obligations, net of current portion |
$ | 688 | $ | 485 | ||||
In connection with the financing of the acquisition of GeoLogic Solutions, Inc., the Company
entered into a three-year secured credit facility with Silicon Valley Bank (SVB) consisting of a
$10.0 million revolving line of
credit bearing interest at a floating rate equal to 0.5% over SVBs Prime Rate. Also in connection
with the acquisition of GeoLogic Solutions, Inc., the Company entered into a four year secured
credit facility consisting of an $8.0 million term loan with Partners for Growth II, L.P. (PFG)
bearing interest at a fixed rate of 14.5%, subject to adjustment under various circumstances. In
the first quarter of fiscal 2010 both facilities were paid in
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full and subsequently canceled. At
the same time the remaining unamortized balance of the related debt financing costs of $0.5 million
was charged to interest expense on financing activities in the consolidated statement of
operations.
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
three months ended December 30, 2009 was approximately $0.3 million. The Company used proceeds of
the convertible debt for the purchase of Turnpike, 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 $0.2 million
of re-measurement charges that were recorded for the three months ended December 31, 2009. 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.
The balance of the Companys capital lease obligation with BCCL was $1.6 million at December 31,
2010.
Note 7. 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 approval. Preferred stock may include the right to vote as a series on
particular matters, preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions.
Series B
In
December 2003, the Company sold 1,612,903 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 Companys common stock. The Series B Preferred Stock pays a cumulative dividend of 4% of the
original issue price per annum (payable
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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
2010 the Company issued 80,946 shares of Series B Preferred Stock to Trident for payment
of accrued dividends. Based on the market value of the Companys common stock on the date of the
dividend payment, the payment of the dividend in additional shares of Series B Preferred Stcok
results in a non-cash dividend of $0.2 million in fiscal 2010.
In the
first quarter of fiscal 2011 the Company issued 41,805 shares of Series B Preferred Stock to
Trident for payment of accrued dividends. Based on the market value of the Companys common stock
on the date of the dividend payment, the payment of the dividend in additional shares of Series B
Preferred Stock results in a non-cash dividend of $0.1 million for the three months ended December
31, 2010.
Series C
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 Companys common stock.
Series D
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
Companys common stock.
Series E and Series F
In February 2009, the Company sold 1,355,857 shares of Series E Preferred Stock for $3.0 million,
or $2.22 per share. Each share of the Series E Preferred Stock was converted into one share of the
Series F Preferred Stock in April 2009 and the Certificate of Designation for the Series E
Preferred Stock was cancelled. Each share of Series F Preferred Stock is convertible into one share
of the Companys common stock.
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 on February 19, 2010, subsequent to shareholder approval. Each share of
Series G Preferred Stock is convertible into one share of the Companys common stock. The price
per share of Series G Preferred Stock and the conversion price for the common stock is $3.00. The
Series G Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock
upon demand of the holders after five years from the date of issuance, a change in control, or an
Acceleration Event (as defined in the Certificate of Designation of the Series G Preferred Stock).
In that case, the Series G Preferred Stock pays a cumulative dividend of 4% of the original issue
price per annum on each outstanding share of Series G Preferred Stock (payable in cash). The
Series G Preferred Stock has a non-participating liquidation right equal to the original issue
price, plus accrued unpaid dividends, which is senior to the Companys common stock and the Series
B, Series C, Series D and Series F Preferred Stock. The Company may redeem the Series G Preferred
Stock at its option after five years from the date of issuance at the original issue price, plus
accrued unpaid dividends, if the market value of the common stock is at least three times the then
effective conversion price for a specified period.
Additionally, 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.
In connection with this transaction, the Company recognized a beneficial conversion feature valued
at $1.7 million. The beneficial conversion value was determined by first allocating the proceeds
from the convertible
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debt on a fair value basis between the underlying preferred stock and the
warrants and then comparing the fair value of the preferred stock and the computed purchase price
on the date of the commitment. The difference between the fair value and the computed purchase
price was recorded as the value of the beneficial conversion and was recorded as a debit to the
preferred stock and a credit to additional paid in capital at the time of conversion. In addition,
the Company recognized a deemed dividend of $1.7 million related to the beneficial conversion
feature because the value was available to the holders since the shares were immediately eligible
for conversion. The deemed dividend was recognized as a charge to accumulated deficit and a credit
to the preferred stock.
No broker or placement agent was involved in the placement of the preferred stock and warrants in
this transaction and no commissions or other compensation was paid.
Common Stock Warrants
The Company has issued warrants for the purchase of common stock to management, consultants and
placement agents. Compensation expense associated with the warrants has not been material and has
been recorded as expense at its fair value.
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
three month period ended December 31, 2010 (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 December 31, 2010 |
4,804 | $ | 3.14 | 5.0 | ||||||||
Note 8. Net Loss Per Common Share
Basic loss per common share is computed based on the weighted average number of common shares
outstanding by dividing net loss applicable to common shareholders by the weighted average number
of common shares outstanding for the period. Generally, diluted net income per common share
reflects the potential dilution that could occur if securities or other obligations to issue common
stock such as options, restricted stock units, warrants or convertible preferred stock, were
exercised or converted into common stock that then shared in the earnings of the Company. However,
diluted net loss per common share is equal to basic net loss per common
share for all periods presented because the effect of including such securities or obligations
would have been antidilutive
Potentially dilutive securities representing approximately 16.4 million and 6.5 million shares of
common stock outstanding for the three months ended December 31, 2010 and 2009, respectively, were
excluded from the computation of diluted earnings per share because their effect would have been
antidilutive.
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Note 9. Legal Proceedings
During fiscal 2009, the Company was named as one of six defendants in a patent infringement
lawsuit. The Company reached a settlement agreement with the plaintiff that dismissed the Company
from the lawsuit and provides the Company with a fully paid-up irrevocable and perpetual license to
the patents at issue, in exchange for cash compensation. The Company recognized $1.2 million in
legal and settlement expenses during fiscal 2009 related to this matter.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
Except for the historical information contained herein, the matters discussed in this Report on
Form 10-Q are forward-looking statements involving risks and uncertainties that could cause actual
results to differ materially from those in such forward-looking statements. Numerous factors,
risks and uncertainties affect the Companys operating results and could cause the Companys actual
results to differ materially from forecasts and estimates or from any other forward-looking
statements made by, or on behalf of, the Company, and there can be no assurance that future results
will meet expectations, estimates or projections. Risks and uncertainties about us include, but
are not limited to, the following:
| 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 and 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
productline, which provides the commercial trucking industry with wireless asset management
solutions in the for-hire segment of the over-the-road transportation sector.
In December 2009, XATA acquired Turnpike Global Technologies. Inc. and Turnpike Global
Technologies, LLC (combined Turnpike), a Personal Digital Assistant (PDA)-based fleet operations
solution provider. Turnpikes 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 nations 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 customers fleet management needs:
| Technology. XATA provides a total fleet management solution, including software, hardware systems and services through the following solutions: |
| XATANET, our web-based, on-demand scalable software, includes a variety of web-based enterprise applications. XATANET provides critical real-time information about our customers fleets, allows for paperless driver logs and provides summary and granular reports on driver and vehicle performance. XATANET can also integrate with back-office applications, for a seamless flow of information, and our software works with a variety of in-cab communications devices. | ||
| MobileMax helps for-hire trucking companies track and manage nearly every aspect of their fleets activities to help control costs and increase ROI. The MobileMax solution features Multi-Mode communication capabilities that automatically switch between land-based and satellite communications to take advantage of the cost-savings and reliability of both terrestrial and satellite communication. MobileMax integrates with dispatching and routing applications for a seamless flow of information. | ||
| 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). Turnpike interacts with various handheld devices using Bluetooth as a wireless in-cab communication medium. The information collected by 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 Boards Accounting
Standards Codification (Codification) and consider the various staff accounting bulletins and other
applicable guidance issued by the SEC. GAAP, as set forth within the Codification, 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
financial statements as well as the reported amounts of revenues and expenses during the periods
presented. To
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the extent there are material differences between these estimates, judgments or assumptions and
actual results, our 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 managements judgment in its application. There are also areas in
which managements 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.
During the first quarter of fiscal 2011, 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). 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 products 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 products functionality.
Revenue Recognition
The Company derives its revenue from sales of (1) software, which includes monthly subscriptions
from XATANET and Turnpike solutions, and monthly fees from the MobileMax solution; (2) hardware
systems, which includes hardware, warranty, repair, and activation 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 Companys
direct-sales include sales of the Companys solutions primarily to fleet operators and logistics
providers. The Companys channel sales are driven from Company personnel working in tandem with
Partners, as defined below, to sell the Companys products to fleets of all sizes and types.
The Companys XATANET customers typically enter into multi-year agreements with automatic renewal
features. XATANET 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 Turnpike customers operated under month-to-month
contracts and were allowed to provide a 30-day termination notice. However, beginning in the latter
half of fiscal 2010 Turnpike direct customer contract renewals were for a minimum of a one-year
term, with an automatic one-year renewal period. Similar to XATANET customers, under the new
contracts, Turnpike customers are provided the option to terminate their
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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.
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 have been
transferred. For most of the Companys 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 that include tangible products that contain software that is
essential to the tangible products functionality and undelivered software elements that relate to
the tangible products 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 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 doesnt exist, ESP is determined for the purposes
of allocating the arrangement by considering several external and internal 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 Companys go-to-market strategy. As the Companys 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 Companys
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 software component of the Companys XATANET and Turnpike solutions, functions together with the
hardware system component to deliver the solutions functionality. As a result, the Company has
identified two deliverables in arrangements involving the sale of these solutions. The first
deliverable is the hardware system component. The second deliverable is the hosting of the software
essential to the functionality of the hardware system, which is provided by the Company (referred
to throughout this document as software). The Company has allocated revenue between these two
deliverables using the relative selling price method. The Company maintains VSOE for the software
deliverable and TPE for the hardware system deliverable. As such, the allocation of
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revenue has been based on the available information. Amounts allocated to the delivered hardware
system are recognized at the time of sale provided the other conditions for revenue recognition
have been met. Amounts allocated to essential solution software are deferred and recognized on a
straight-line basis over the term of the agreement with the customer.
Revenue Recognition for Software Products
The Company accounts for multiple element arrangements that consist only of software or
software-related products, which include the Companys MobileMax solution, 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.
Revenue Recognition for Revenue Recognized under Partnership Agreements
The Company has entered into partnership agreements with various companies, collectively the
Partners, 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 partnership agreements in accordance with ASC 605-45
Revenue Recognition Principal Agent Considerations, based upon the terms of each partnership
agreement.
Other Revenue Recognition Policies Applicable to Software and Nonsoftware Elements
Many of the Companys software arrangements include services, such as implementation, installation,
driver and education and consulting services sold separately under engagement contracts and are
included as a part of the Companys services business. Revenues from these arrangements are
generally 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 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.
There were no changes to the Companys other critical accounting policies during the first quarter
of fiscal 2010. Please refer to Managements Discussion and Analysis of Financial Condition and
Results of Operations contained in 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 Months Ended December 31, 2010 and 2009
The following table sets forth detail related to revenue, cost of goods sold, and gross margins:
For the Three Months | ||||||||
Ended December 31, | ||||||||
2010 | 2009 | |||||||
Software |
||||||||
Revenue |
$ | 11,341 | $ | 9,676 | ||||
Cost of goods sold |
2,773 | 2,390 | ||||||
Gross margin |
$ | 8,568 | $ | 7,286 | ||||
Gross margin % |
75.5 | % | 75.3 | % | ||||
Hardware systems |
||||||||
Revenue |
$ | 1,733 | $ | 6,197 | ||||
Cost of goods sold |
2,041 | 6,309 | ||||||
Gross deficit |
$ | (308 | ) | $ | (112 | ) | ||
Gross deficit % |
(17.8 | %) | (1.8 | %) | ||||
Services |
||||||||
Revenue |
$ | 904 | $ | 1,090 | ||||
Cost of goods sold |
865 | 744 | ||||||
Gross margin |
$ | 39 | $ | 346 | ||||
Gross margin % |
0.0 | % | 31.7 | % | ||||
Other |
||||||||
Revenue |
$ | | $ | 560 | ||||
Cost of goods sold |
(21 | ) | 249 | |||||
Gross margin |
$ | 21 | $ | 311 | ||||
Gross margin % |
0.0 | % | 55.5 | % | ||||
Total |
||||||||
Revenue |
$ | 13,978 | $ | 17,523 | ||||
Cost of goods sold |
5,658 | 9,692 | ||||||
Gross margin |
$ | 8,320 | $ | 7,831 | ||||
Gross margin % |
59.5 | % | 44.7 | % |
Revenue
Total revenue decreased 20.2 percent to $14.0 million for the three months ended December 31, 2010
compared to $17.6 million for the same period in fiscal 2010.
Software revenue, including monthly subscriptions from XATANET and Turnpike solutions, and monthly
fees from MobileMax, increased 17.2 percent to comprise 81.1 percent of total revenue for the three
months ended December 31, 2010 compared to 55.2 percent of total revenue for the same period in
fiscal 2010. The growth in software revenue reflects an increase in the number of subscriptions, strong customer renewal, and
the launch of new software functionality. Organic revenue growth was 4.5 percent driven by organic
revenue growth of XATANET and Turnpike of 12.5 percent.
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Hardware systems revenue, which includes hardware, warranty, repair, and activation revenue,
decreased 23.0 percent to comprise 12.4 percent of total revenue for the three months ended
December 31, 2010 compared to 35.4 percent for the same period in fiscal 2010. The decline in
hardware systems revenue has been impacted by a delayed transition to the next generation on-board
XATANET platform and continued customer migration to lower priced hardware systems.
Services revenue remained consistent at 6.5 and 6.2 percent of total revenue, for the three months
ended December 31, 2010 and 2009, respectively. Service revenue, which includes training,
implementation, installation, and professional service revenue, was $0.9 million of total revenue
for the three months ended December 31, 2010, which was a decline of 17.1 percent compared to the
same period in fiscal 2010 as a result of lower hardware system sales.
Cost of Goods Sold and Gross Margin
Cost of software. Cost of software consists of communication, hosting costs, depreciation of units,
and direct personnel costs related to network, infrastructure, and Turnpike customer support. Cost
of software increased 16.0 percent for the three months ended December 31, 2010, compared to the
same period in fiscal 2010 supporting software revenue growth of 17.2 percent over the same period
in fiscal 2010. The margin improvement was driven by the increased number of software subscriptions
and a reduction in communication costs.
Cost of hardware systems. 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 decreased 67.6 percent for the three months ended December 31,
2010, compared to the same period in fiscal 2010 while hardware system revenue decreased 72.0
percent over the same period. Hardware systems gross margins decreased 16.0 percentage points for
the three months ended December 31, 2010 compared to the same period in fiscal 2010 as a result of
increased support and warranty costs as a percentage of revenue.
Cost of services. Cost of services consists of third party vendor costs and direct costs related to
service personnel. Cost of services decreased 16.3 percent for the three months ended December 31,
2010, respectively, compared to the same period in fiscal 2010. Service gross margins decreased
31.7 percentage points for the three months ended December 31, 2010, compared to the same period in
fiscal 2010. Service margins were impacted by a decrease in hardware systems activity.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of employee salaries in our executive, sales,
client management and administration functions, sales commissions, marketing and promotional
expenses, administrative and facilities costs, and professional fees. Selling, general and
administrative expenses were $6.1 million or 43.7 percent of revenue for the three months ended
December 31, 2010 compared to $6.2 million and 35.1 percent of revenue for the same period in
fiscal 2010. For the three months ended December 31, 2010, total selling, general and
administrative expenses decreased by $0.1 million while including an entire quarter of Turnpike
selling, general and administrative expenses.
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 $2.2 million or 15.9
percent of revenue for the three months ended December 31, 2010 compared to $1.3 million or 7.6
percent of revenue for the comparable period in fiscal 2010. Research and development expenses
increased as we continue to invest in our
current solutions and future functionality, as well as incur additional costs as a result of the
acquisition of Turnpike.
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Acquisition Related Costs
In connection with the acquisition of Turnpike, the Company incurred costs of $0.8 million of
direct out-of-pocket costs for the three months ended December 31, 2009. In accordance with ASC 805
Business Combinations, the Company expensed these costs as incurred as period costs. Similar
charges were not recorded for the three months ended December 31, 2010.
Interest Expense on Financing Activities
There was no interest expense on financing acitivities recorded for the three months ended December
31, 2010. Interest expense on financing acitivities recorded for the three months ended December
31, 2009 was approximately $0.8 million, which included interest related to the convertible debt of
$0.3 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.
Acquisition Related Interest and Mark to Market Expense
During the three months ended December 31, 2009, the fair value of the common shares and contingent
earn out was 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 $0.2 million for the three months
ended December 31, 2009.
Net Interest and Other Expense
Net interest and other expense was $0.1 million for the three months ended December 31, 2010, a
decrease of $0.2 million compared to $0.3 million for the comparable period in fiscal 2010. This
decrease was driven by the accelerated payoff of certain debt facilities.
Income Taxes
An income tax benefit of $15,000 was recorded for the three months ended December 31, 2010 to
recognize a refundable research and development credit available to the Company. The Company does
not have objectively verifiable positive evidence of future taxable income as prescribed by ASC 740
- Income Tax. Accordingly, we concluded that a 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 loss to common shareholders of $0.1 million and $1.7 million for the three
months ended December 31, 2010 and 2009, respectively. Net loss to common shareholders reflect
preferred stock dividends and preferred stock deemed dividends of $0.1 million for each of the
three months ended December 31, 2010 and 2009, respectively.
Liquidity and Capital Resources
As of December 31, 2010, the Company held $14.0 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 $18.0 million as compared to $19.1 million
at September 30, 2010.
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Operating activities provided cash of $1.5 million and used cash of $3.3 million during the three
months ended December 31, 2010 and 2009, respectively. Cash provided by operating activities
increased compared to the same period in fiscal 2010 due to improved earnings and changes in
components of working capital, primarily a decrease in accounts receivable.
Cash used in investing activities was $0.5 million for the three months ended December 31, 2010 as
the result of planned fixed asset expenditures.
Cash used by financing activities of $0.3 million for the three months ended December 31, 2010
primarily reflect payments of capital lease obligations for Turnpike units. Payments on long-term
borrowing the three months ended December 31, 2009 reflect capital lease payments of $0.3 million
and pay-off of 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 at least through the remainder of fiscal 2011. 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 three months ended December 31, 2010 and 2009, 42,000 and 40,000 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
On December 31, 2010, our Chief Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Rule 13a-15(e)). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and (ii) accumulated and communicated to the Chief
Executive Officer and Chief Financial Officer to allow timely decisions regarding required
disclosure.
There were no changes in our internal controls over financial reporting that occurred during our
most recent fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
During fiscal 2009, the Company was named as one of six defendants in a patent infringement
lawsuit. The Company reached a settlement agreement with the plaintiff that dismissed the Company
from the lawsuit and provides the Company with a fully paid-up irrevocable and perpetual license to
the patents at issue, in exchange for cash compensation. The Company recognized $1.2 million in
legal and settlement expenses during fiscal 2009 related to this matter.
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.
Submission of Matters to a Vote of Security Holders
The annual meeting of
shareholders of the Company was held on February 2, 2011. As of the record date,
December 13, 2010, there were 10,626,404 shares of Common Stock and 16,384,498
shares of Series B, Series C, Series D, Series F and Series G Preferred Stock
of the Company (which votes as if converted to Common Stock on 1 for 1 basis)
entitled to vote at the meeting.
There were in attendance at the meeting in person or by
proxy holders of approximately 21.7 million shares of voting stock,
which is equivalent to approximately 80% of the total number of eligible
voting shares of the Company issued and outstanding.
Matters voted upon and the results thereof are as follows:
1. | Nine (9) directors (including Donald R. Dixon, who was elected by the holders of the Series B Preferred Stock, voting separately by ballot as a class) were elected to serve for a one-year term expiring when their successors are elected and qualified at the annual meeting in 2012. |
For | Withheld | |||||||
John J. Coughlan |
21,477,649 | 257,873 | ||||||
Thomas G. Hudson |
21,479,759 | 255,763 | ||||||
Roger W. Kleppe |
21,479,759 | 255,763 | ||||||
Chad M. Lindbloom |
21,406,999 | 328,523 | ||||||
Christopher P. Marshall |
21,232,859 | 502,663 | ||||||
Michael J. Paxton |
21,478,659 | 256,863 | ||||||
Bharat S. Vedak |
21,471,559 | 263,963 | ||||||
Karen T. Beckwith |
21,478,659 | 256,863 | ||||||
Donald R. Dixon |
2,126,362 | -0- |
2. | Approval of the resolution related to the Companys Executive Officer Compensation Plan. |
For: 21,479,745 Against: 253,170 Withheld: 2,607 Broker Non-Vote: -0- |
3. | Approval of the frequency of required approval of the Companys Executive Officer Compensation Plan. |
1 Year: 733,330 2 Years: 20,971,526 3 Years: 11,325 Withheld: 19,341 Broker Non-Vote: -0- |
Item 6. Exhibits.
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: February 4, 2011 | XATA Corporation (Registrant) |
|||
by: | /s/ Mark E. Ties | |||
Mark E. Ties | ||||
Chief Financial Officer (Signing as Principal Financial and Accounting Officer, and as Authorized Signatory of Registrant) |
36