Item 1A. Risk Factors
We do not have a long or stable history of profitable operations. The Company’s net losses to common shareholders for the fiscal years 2010 and 2009 were $3.2 million and $2.8 million, respectively. The respective periods’ net losses were $1.3 million and $2.1 million. Additional amounts of $1.9 million and $0.7 million, resulting from beneficial conversion charges and preferred stock dividends increased such respective period losses to the aforementioned levels of net losses to common shareholders.
Our existing customers might cancel contracts with us, fail to renew contracts or fail to purchase additional services and products. We sell large orders to individual fleets and may be dependent upon a few major customers each year whose volume of purchases is significantly greater than that of other customers. As we continue to grow our existing customer base this risk will lessen, but until such time we are still dependent on our installed customer base for our recurring revenues, which is a significant portion of our overall revenue. Our private fleet and for- hire customers historically have renewed at a
high rate. Notwithstanding these retention rates, if our customers cancel existing contracts, fail to renew their service contracts or fail to purchase additional services or products, then our revenues could decrease and our operating results could be adversely affected.
Our market is highly competitive and is subject to revenue fluctuations. Many of the companies who offer competitive products offer products ranging in sophistication and cost from basic onboard recorders to advanced mobile satellite communication and information systems. Their products may offer better or more functions than ours or may be more effectively marketed. In addition, the nature and sources of competition in our industry are rapidly evolving and increasingly depend on the ability to deliver integration of multiple information systems. Given that the period required to complete a sale of our systems has historically been up to a year or longer, we must continue the development of new technologies and the adaptation of new and existing products to be compatible with products and services provided by others in the industry. The length of our sales cycle may also result in quarter-to-quarter fluctuations in revenue. The fleet trucking segment of the transportation industry is also subject to fluctuations and business cycles and a significant downturn in its prospects could have a material, adverse affect on us. Moreover, our customers and potential customers may freeze or reduce budget spending during the current economic downturn, which could further delay our sales and adversely affect our results of operations.
We have a limited number of products and those products are concentrated in one industry. Although our systems have potential applications in a number of industries, to date we have targeted only the trucking segment of the transportation industry. If this market segment experiences a downturn that decreases our sales, the development of new applications and markets could take several months or longer, and could require substantial funding. In addition, our future success is dependent in part on developing and marketing new software applications. We cannot assure that new applications can be successfully developed or marketed in a timely manner.
We are dependent on key contract manufacturers. We use a variety of product and engineering vendors, a small number of which are critical to our business. The Company’s continued growth could place an increasing strain on these vendors and the loss of key contract manufacturers in a period of rapid growth could adversely affect our financial condition and operating results.
We are dependent on proprietary technology. Our success is heavily dependent upon proprietary technology. We have been issued patents by the United States Patent and Trademark Office that cover certain aspects of our technology and processes and have recently applied for several software-related patents, but we have not yet been awarded patents on any of our software programs. We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures, and contractual provisions to protect our proprietary rights. These measures afford only limited protection. Our means of protecting our proprietary rights may prove inadequate, or our competitors may independently develop similar technology, either of which could adversely affect us. In addition, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our systems or obtain and use information that we regard as proprietary.
We depend on wireless communication networks owned and controlled by others. If we are unable to deliver continued access to communication services with sufficient capacity, our revenues could decrease. Our ability to grow and achieve profitability depends on the ability of satellite and digital cellular wireless carriers to provide sufficient network capacity, reliability and security to our customers. Even where wireless carriers provide coverage to entire regions, there are occasional lapses in coverage. These effects could make our services less reliable and less useful, and customer satisfaction could suffer. Our financial condition could be seriously harmed if our wireless carriers were to increase the prices of their services, or to suffer operational or technical failures.
Our products may quickly become obsolete. Our systems utilize proprietary software and onboard computer gateways and touch-screen displays. Although we believe our proprietary software is more important in the capture and communication of operating data than the hardware on which the software operates, continued improvements in hardware may render our technology, including its software,
obsolete. The field of software and hardware is constantly undergoing rapid technological change and we may not be able to react and adapt to changes in this field. Moreover, development by our competitors could make our systems and services less competitive or obsolete. We believe that advancements in hardware and communications technology provide opportunities for us to form alliances with companies offering products complementary to our systems and services, but we cannot assure that we can form alliances with such companies or that any such alliance will be successful. Our success depends, in large part, on our ability to anticipate changes in technology and industry standards, and develop and introduce new features and enhancements to our system on a timely basis. If we are unable to do so for technological or other reasons or if new features or enhancements do not achieve market acceptance, our business could be materially and adversely affected. We may encounter technical or other difficulties that could in the future delay the introduction of new systems or system features or enhancements.
Our industry is subject to significant and increasing regulations that could impact our product offerings. Both our industry, and the trucking industry that serves as our customer base, are subject to numerous legal, legislative and regulatory rules that place mandates on many aspects of the businesses, including the collection and maintenance of data, operational and safety requirements of products and methods of reporting driver and vehicle information. If new rules, regulations or laws are created that make our products or services less valuable or unauthorized we could lose customers and revenue or be required to spend additional capital to gain compliance.
Third parties may claim we infringe their intellectual property rights. Many participants in the technology industry, as well as third parties that have obtained patent rights, have regularly demonstrated a readiness to take legal action based on allegations of patent and other intellectual property infringement. Accordingly, we may be subject to claims that our products infringe on the intellectual property rights of others. Any such claim, whether valid or not, may be time consuming and expensive to defend. Such claims or litigations could require us to stop selling the affected products, redesign those products to avoid infringement, or obtain a license, all of which would be costly and harm our business. The Company is currently named as one of many defendants in a patent infringement lawsuit. We have been able to reach settlement agreements in past cases.
Technology Crossover Ventures (“TCV”), JDSTG and Trident Capital, who are represented on our Board of Directors, individually and together own enough stock to exert significant influence over XATA. As of December 13, 2010, beneficial ownership of Common Stock, as reported in our definitive proxy statement for the Annual Meeting of Stockholders, held by TCV was approximately 52.9 percent, by JDSTG was approximately 20.2 percent and by Trident Capital was approximately 43.8 percent of our common stock. In addition, JDSTG is entitled to nominate up to three representatives to our Board of Directors, and both TCV and Trident is entitled to each elect up to two representatives. Both TCV and Trident are entitled to vote their Preferred Stock as if converted to common stock and to vote as a separate class (to the exclusion of the holders of common stock) on the election of its two director nominees. Each of TCV, JDSTG and Trident benefit from certain restrictive covenants of XATA in connection with their equity investments in the Company. The combination of stock ownership and Board of Director representation enables these shareholders, individually and together, to a greater degree, to exercise significant influence over the Company.
We may need additional capital. If we do not generate anticipated cash flow to support our anticipated inorganic growth, our predictions regarding cash needs may prove inaccurate and we may require additional financing. During fiscal year 2010, the Company raised $30.2 million in convertible debt, which was used towards the purchase of Turnpike and to pay off the term loan with PFG of $8.0 million and the litigation settlement. Subsequent to shareholder approval in February 2010, the convertible debt was converted into shares of Series G Preferred Stock. The remaining proceeds will be utilized in working capital needs and future growth. We believe our current capital structure and predicted future cash flows from operations will be adequate to meet our operating and organic growth needs.
If our common share price decreases to a level such that the fair value of our net assets is less than the carrying value of our net assets, we may be required to record additional significant non-cash charges associated with goodwill impairment. We account for goodwill in accordance with Accounting Standards Codification (ASC) 350-20, Intangibles - Goodwill and Others. ASC 350-20, among other things, requires that goodwill be tested for impairment at least annually. We have designated July 1 as the date for our annual impairment test. Although the results of our testing on July 1, 2010, indicated no evidence of impairment, should the fair value of our net assets, determined by our market capitalization, be less than the carrying value of our net assets at future annual impairment test dates, we may have to recognize goodwill impairment losses in our future results of operations. This could impair our ability to achieve or maintain profitability in the future.
Fair value assessments of our intangible assets required by GAAP may require us to record significant non-cash charges associated with intangible asset impairment. A significant portion of our assets are intangibles relating to customer relationships and technology. We amortize these assets on a straight-line basis over their estimated lives. We review the carrying value of these assets at least annually, or more frequently if unusual events or market conditions warrant, for evidence of impairment. In accordance with ASC 360-10, Property, Plant, and Equipment - Overall, an impairment loss is recognized when the estimate of undiscounted future cash flows generated by such assets is less than the carrying amount. Measurement of the impairment loss is based on the present value of the expected future cash flows. Future fair value assessments of intangible assets may require impairment charges to be recorded in the results of operations for future periods. This could impair our ability to achieve or maintain profitability in the future.
We may issue additional stock without shareholder consent. We have authorized 100,000,000 shares of common stock, of which 9,816,411 shares were issued and outstanding as of December 1, 2010. The Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares. Additional shares may be issued in connection with future financing, acquisitions, employee stock plans, or otherwise. Any such issuance will dilute the percentage ownership of existing shareholders. We are also currently authorized to issue up to 50,000,000 shares of preferred stock. As of December 1, 2010, 2,126,362 shares of Series B Convertible Preferred Stock, 1,269,036 Series C Convertible Preferred Stock, 1,566,580 shares of Series D Convertible Preferred Stock, 1,355,857 shares of Series F Convertible Preferred Stock, and 10,066,663 shares of Series G Convertible Preferred Stock were issued and outstanding. The Board of Directors can issue additional 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. The issuance of preferred stock could adversely affect the rights of the holders of common stock and reduce the value of the common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party.
Our directors’ liability is limited under Minnesota law and under certain agreements. Our Articles of Incorporation, as amended and restated, state that our directors are not liable for monetary damages for breach of fiduciary duty, except for a breach of the duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases illegal under Minnesota law or for any transaction in which the director derived an improper personal benefit. In addition, our bylaws provide that we shall indemnify our officers and directors to the fullest extent permitted by Minnesota law for all expenses incurred in the settlement of any actions against them in connection with their service as officers or directors of the Company. In addition, we have entered into indemnification agreements with TCV and Trident investors, and its representatives who serve as directors on our Board, which may supplement the indemnification provisions available to them under Minnesota law.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
On July 9, 2007, we entered into a lease for 26,800 square feet of office space at 965 Prairie Center Drive in Eden Prairie, Minnesota. On December 10, 2007, this location became the principal address of the company. The lease term is for 86 months with a base rent of $33,000 per month plus the building operating expenses.
Effective January 1, 2009, we began leasing 15,800 square feet of office and warehouse space in Burnsville, Minnesota. This facility houses the Company’s distribution activities. This lease obligation has a base rent of $7,900 per month plus a pro rata share of the building operating expenses and expires March 31, 2014.
XATA and its wholly owned subsidiary, Geologic Solutions, Inc., have been named as defendants in two companion lawsuits in the United States District Court, Western District of North Carolina, Asheville Division. The plaintiffs allege against XATA and Geologic that Geologic created an unsafe product that permitted drivers to send and/or receive text messages while the vehicle is in motion. The plaintiffs claim damages in a nonspecific amount, but exceeding $75,000. In both cases the assigned U.S. Magistrate recommended that the cases be dismissed. Those Orders have been appealed to the District Judge by plaintiffs and the parties are awaiting the Court’s orders.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table sets forth the quarterly high and low sales prices for our common stock as reported by the NASDAQ Capital Market for fiscal years 2010 and 2009. There is no market for our Series B, Series C, Series D or Series F Preferred Stock.
As of December 1, 2010, our common stock is held by 117 registered holders of record. Registered ownership includes nominees who may hold securities on behalf of multiple beneficial owners.
Dividend Policy
Except for dividends paid to the holders of Series A 8 percent Convertible Preferred Stock (from issuance in May 1999 until conversion in full in August 2000), we have never paid cash dividends on any of our securities. We have retained any earnings for use in our operations. Our Board of Directors will determine future dividend payments, if any, based upon our earnings, capital needs and other relevant factors.
On December 6, 2003, we issued 1,613,000 shares of Series B Preferred Stock that pays an annual cumulative dividend of 4 percent of the original issue price (payable in additional shares of Preferred Stock or cash, at the option of the holders). The Series B Preferred Stock provides that we cannot pay dividends to the holders of any other capital stock unless and until we have paid dividends accrued on the Series B Preferred Stock. The holders of the Series B Preferred Stock elected to receive dividends due and payable on May 31 and November 30 annually in additional shares of Series B Preferred Stock rather than cash. Accordingly, we issued a total of 81,000 and 78,000 shares of Series B Preferred Stock for payment of dividends in fiscal 2010 and 2009, respectively.
Sale of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and the related notes included in this Report. This Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those in such forward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this Report.
Overview
XATA is one of the leading providers of fleet management solutions to the truck transportation industry. Our innovative technologies and value-added services are intended to enable customers to optimize the utilization of their assets and enhance the productivity of fleet operations across the entire supply chain, resulting in decreased costs, improved compliance with U.S. Department of Transportation (DOT) regulations, and enhanced customer service.
Founded in 1985, XATA began providing fleet management solutions to the private fleet segment of the truck transportation industry. XATA currently addresses the private fleet segment through XATANET, its flagship software-as-a-service (SaaS) solution. With the acquisition of GeoLogic Solutions, Inc. in January of 2008, XATA expanded its solutions to include the MobileMax product line, which provides the commercial trucking industry with wireless asset management solutions in the for-hire segment of the over-the-road transportation sector.
In December 2009, XATA acquired Turnpike Global Technologies, a Personal Digital Assistant (PDA)-based fleet operations solution provider. Turnpike’s XATA Turnpike products allows XATA to continue its growth strategy by expanding the addressable market through low-cost options to include small and medium-size fleets in North America and key vertical markets, such as Less Than Truckload (LTL), and the automation of fuel tax reporting.
Over the past two decades, XATA has developed relationships with the nation’s largest fleets including CVS Pharmacy, Dean Foods, Sysco, US Foodservice, and xpedx to find and develop technologies that provide information about their fleets and transform that data into actionable intelligence. With the acquisition of Turnpike, XATA has relationships with additional customers such as 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 systems.
Technology, People, Processes
XATA takes a three-prong approach to meeting its customer’s fleet management needs:
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Technology. XATA provides a total fleet management solution, including hardware, software and services through the following solutions:
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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.
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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.
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XATA Turnpike is a PDA-based SaaS solution that enables XATA to serve any size fleet that requires a simple low investment solution. XATA Turnpike has expanded our addressable market to include key vertical markets such as Less Than Truckload and beverage, where XATA Turnpike meets specific customer needs. XATA Turnpike is unique in that it does not contain an embedded modem. Most onboard fleet Management systems utilize an expensive in-cab system dependant on a cellular or satellite communication platform to transmit data, while XATA Turnpike uses PDA based communication devices via Bluetooth as its wireless communication tool. XATA Turnpike interacts with various handheld devices such as smartphones and cell phones and thus eliminating upfront hardware costs and providing a low investment solution.
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People. With employee expertise in safety, fleet management and technology, XATA is able to provide consultation services to help organizations implement best practices for fleet productivity and develop specific customer hardware and reporting requirements.
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Processes. All XATA processes are designed to make managing fleets easier. Drawing on hundreds of successful implementations with a wide variety of fleets including multibillion-dollar organizations, 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
Accounting policies, methods and estimates are an integral part of our financial statements and are based upon management’s current judgments. Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements. Note 2 of the Notes to Financial Statements includes a summary of the significant accounting policies and methods we use. The following is a discussion of what we believe to be the most critical of these policies and methods.
Revenue Recognition. The Company derives its revenue from sales of systems, software and related services. The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 985-605 - Software - Revenue and ASC 605-10 - Revenue Recognition - Overall.
Software revenue is recognized under ASC 985-605 and ASC 605-10 when (i) persuasive evidence of an arrangement exists (for example a signed agreement or purchase order), (ii) delivery has occurred, as evidenced by shipping documents or customer acceptance, (iii) the fee is fixed or determinable and payable within twelve months, and (iv) collectability is probable and supported by credit checks or past payment history.
With regard to arrangements involving multiple elements, the Company allocates revenue to the software and services elements based on the fair value of each element with the residual amount allocated to the systems revenue which is recognized upon delivery. The Company’s determination of fair value relating to the software and services elements in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company’s assessment of VSOE for each element is either the price charged when the same element is sold separately or the price established by management if that item is not yet sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and has determined that it has sufficient VSOE to allocate revenue to the services and software components of its arrangements. Accordingly, assuming all other revenue recognition criteria are met, revenue from the software component is recognized ratably over the applicable term.
With regards to arrangements involving multiple-elements that do not give customers the explicit contractual right to take possession of our software at any time during the hosting period, revenue is recognized in accordance with ASC 605-25. Under ASC 605-25, the hardware element must have stand alone value and the monthly service element must have objective and reliable evidence of the fair value. Revenue is allocated based on the fair value of each element as evidenced by vendor specific objective evidence. Such evidence consists primarily of pricing of multiple elements as if sold as separate products or services. When the fair value of any undelivered element included in a multiple-element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and/or services have been performed, or until we can objectively determine the fair value of all remaining undelivered elements.
Agreements that do not meet the VSOE and fair value requirements for the arrangement elements described in ASC 985-605 or ASC 605-25, results in the recognition of all revenue ratably over the term of the agreement.
Third-Party Reseller Agreements. The Company has contracted with various resellers in the US and Canada, collectively the “Resellers”, to allow for them to sell the XATA Turnpike application in combination with their own communication services. The customer contracts directly with the Resellers for the communication services and XATA Turnpike application. The customer is billed by and remits all payments to the Resellers. The Resellers then remit a set portion of revenues collected that relate to the XATA Turnpike application to the Company and retains the remainder as their own revenue. In accordance with ASC 605-45 - Revenue Recognition - Principal Agent Considerations, the Company records the revenue received from the resellers net of the amounts retained by the resellers.
Allowance for doubtful accounts. The Company grants credit to customers in the normal course of business. The majority of the Company’s accounts receivable is due from companies with fleet trucking operations in a variety of industries. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are typically due from customers within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company reserves for these accounts receivable by increasing bad debt expense when they are determined to be uncollectible. Payments subsequently received, or otherwise determined to be collectible, are treated as recoveries that reduce bad debt expense.
Goodwill. As of September 30, 2010, the Company had a goodwill balance of $17.0 million that resulted from the Company’s acquisition of GeoLogic Solutions, Inc. on January 31, 2008 and Turnpike Global Technologies Inc. and Turnpike Technologies LLC on December 4, 2009. The Company records goodwill when the purchase price of net tangible and intangible assets acquired exceeds their fair value. In accordance with ASC 350-20 - Intangibles - Goodwill and Others, the Company reviews goodwill for impairment at least annually, on the first day of the fourth quarter, or more frequently if an event occurs indicating the potential for impairment. Goodwill is not amortized, but instead tested for impairment at the reporting unit level. We have one reporting unit. The annual goodwill impairment test is a two-step process. First, we determine if the carrying value of our related reporting unit exceeds fair value, which would indicate that goodwill may be impaired. If we then determine that goodwill may be impaired, we compare the implied fair value of the goodwill to its carrying amount to determine if there is an impairment loss. The Company completed this review in the fourth quarter of fiscal 2010 and concluded that no impairment existed.
Intangible assets are carried at cost less accumulated amortization. The Company amortizes the cost of identified intangible assets on a straight-line basis over their expected economic lives. In accordance with ASC 360-10 - Property, Plant, and Equipment - Overall, the Company reviews intangible assets that have finite useful lives when an event occurs indicating the potential for earlier impairment. The Company measures impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values. The Company measures fair value under ASC 360-10, which is generally based on the sum of the undiscounted future cash flows. The Company’s analysis is based on available information and on assumptions and projections it considers to be reasonable and supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on the Company’s best estimate of projected future cash flows. If necessary, the Company performs subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.
Product Warranties. The Company sells its products with a limited warranty. The Company provides for estimated warranty costs in relation to the recognition of the associated revenue. Factors affecting the Company’s product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per claim. The Company periodically assesses the adequacy of its product warranty liability based on changes in these factors. At September 30, 2010 and 2009, the Company had an accrual for product warranties of $1.0 million and $1.8 million, respectively. These amounts are included in accrued expenses on the Company’s balance sheet.
Capitalized system development costs. System development costs incurred after establishing technological feasibility are capitalized as capitalized system development costs in accordance with ASC 985-20 - Software - Costs to Be Sold, Leased, or Otherwise Marketed. Costs that are capitalized are amortized to cost of goods sold beginning when the product is first released for sale to the general public. Amortization is at the greater of the amount computed using the ratio of current gross revenues for the product to the total of current and anticipated future gross revenues or the amortization on a straight-line method over the estimated unit sales during the economic life of the product (two to five years). At September 30, 2010, the Company had capitalized development costs of $0.4 million and there were no capitalized development costs at September 30, 2009. Research and development expenses are charged to expense as incurred. Such expenses include product development costs which have not met the capitalization criteria of ASC 985-20.
Income taxes. Deferred income taxes are provided for using the liability method whereby deferred tax assets and deferred tax liabilities are recognized for the effects of taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
On October 1, 2007, the Company adopted ASC 740-10 - Income Tax. ASC 740-10 requires application of a “more-likely-than-not” threshold to the recognition and de-recognition of uncertain tax positions. Under ASC 740-10, once the-more-likely-than-not threshold is met, the amount of benefit to be recognized is the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such a change. The impact of adopting ASC 740-10 on the Company’s consolidated financial statements was not material and no cumulative effect adjustment was recorded to the October 1, 2007 balance of accumulated deficit. In fiscal 2010, the Company recognized no tax benefit or liabilities for uncertainties related to prior and current year income tax positions, which were determined to be immaterial.
Stock-based Compensation. The Company accounts for share-based employee compensation plans under the provisions of ASC 718 - Compensation -Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors
based on estimated fair values. The Company estimates the fair value of options granted using the Black-Scholes option valuation model and the assumptions shown in Note 9 to the financial statements. The Company estimates the volatility of the common stock at the date of grant based on a historical volatility rate, consistent with ASC 718. The decision to use historical volatility was based upon the lack of traded common stock options. The expected term is estimated consistent with the simplified method, as identified in ASC 718-10 - Compensation - Stock Compensation - Overall, for share-based awards granted during fiscal 2010 and 2009. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the options. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest. The fair value of options are amortized over the vesting period of the awards utilizing a straight-line method.
Operating Results
We operate as one business segment and believe the information presented in our Management’s Discussion and Analysis of Financial Condition and Results of Operations provides an understanding of our business, operations and financial condition. The following table sets forth detail related to revenue, cost of goods sold, and gross margins:
In the above chart the revenue and cost of goods sold detail for categories listed are defined as follows:
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Software revenue includes monthly subscriptions from our XATANET and XATA Turnpike solutions, and monthly fees from our MobileMax and OpCenter product lines
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Systems revenue includes hardware, warranty, and repair revenue
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Services revenue includes training, implementation, installation, professional service, and customer funded development revenue
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Software cost of goods sold consists of communication, hosting costs, and direct personnel costs related to network and infrastructure support
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System cost of goods sold consists of the direct product costs, warranty costs, product repair costs, and direct personnel costs related to customer support
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Services cost of goods sold consists of third party vendor costs and direct costs related to service personnel
Comparison of fiscal 2010 operating results to fiscal 2009
Revenue
Revenue increased approximately 8 percent to $70.7 million for fiscal 2010 compared to $65.3 million for fiscal 2009. The revenue growth is driven by an increase in software revenue, as software revenue grew approximately 30 percent to $42,862 from $32,909 in fiscal 2010 and 2009, respectively. Software revenue comprised approximately 61 percent of total revenue for fiscal 2010 compared to approximately 50 percent for fiscal 2009. The software revenue increase resulted from an organic revenue increase of approximately 13 percent as subscription growth and increases in average revenue per unit (ARPU) continued to drive growth in the Company’s core products and the non-organic revenue growth associated with the acquisition of Turnpike. ARPU was positively impacted by increased subscription rates on renewal contracts and rate increases from ala carte applications such as navigation, speed management and fleet performance management. Total subscriptions sold in fiscal 2010 increased 65 percent compared to fiscal 2009 activity.
Systems revenue decreased approximately 14 percent to comprise approximately 31 percent of total revenue for fiscal 2010 compared to approximately 38 percent for fiscal 2009. This decline is due to a decrease in the average sale prices of the Company’s on-board devices as new technology and competition continue to drive device prices down. Other factors contributing to the decline in systems revenue is the fact that the Company’s “system flexible” approach now allows for the selling of the Company’s software solutions in connection with partnered devices, in which case the Company does not record the entire systems revenue on our income statement.
Services revenue decreased approximately 24 percent and comprises approximately 6 percent of total revenue for fiscal 2010 compared to approximately 8 percent for fiscal 2009. The decrease in service revenue is largely driven by a decrease in installation revenue as our service organization installed a smaller percentage of units sold in fiscal 2010 as compared to fiscal 2009.
Cost of Goods Sold and Gross Margin
Overall cost of goods sold decreased approximately 1 percent to $35.9 million for fiscal 2010 compared to $36.1 million for fiscal 2009.
Software cost of goods sold of $10.9 million increased 26 percent for fiscal 2010 compared to $8.7 million in fiscal 2009. This increase supported software revenue growth of 30 percent over the same period. At the end of fiscal 2010, total software subscriptions were over 111,000 compared to approximately 73,000 at the end of fiscal 2009. Software gross margin improved 1 percentage point in fiscal 2010 to 74.6 percent compared to 73.7 percent in fiscal 2009. The margin improvement was the result of increased ARPU, reduction in communication costs and continued leverage of the cost structure.
Systems cost of goods sold of $20.9 million decreased 8 percent for fiscal 2010 compared to $22.9 million in fiscal 2009. Systems gross margins decreased 6 percentage points to 3.3 percent for fiscal 2010 compared to 8.9 percent in fiscal 2009. Declining systems sales prices due to competitive pressures and our inability to lower our system cost along with warranty costs contributed to the decrease in gross margin.
Services cost of goods sold of $3.1 million decreased 15 percent for fiscal 2010 compared to $3.7 million in fiscal 2009. Service gross margins declined 8 percentage points for fiscal 2010 to 22.8 percent compared to 30.9 percent in fiscal 2009. This decrease was primarily the result of the decline in higher margin installation revenue and lower utilization of services personnel compared to the same periods of fiscal 2009.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of employee salaries in our sales, client management and administration functions, sales commissions, marketing and promotional expenses, executive and administrative costs, and accounting and professional fees. Selling, general and administrative expenses were $26.6 million or approximately 38 percent of revenue for fiscal 2010. Included in selling, general, and administrative costs for fiscal 2010 was $3.7 million related to the additional cost structure of Turnpike for the 10 month incremental period not included in fiscal 2009. Included in selling, general, and administrative costs for fiscal 2009 was $1.2 million related to the patent litigation settlement not included in fiscal 2010. Excluding these non-comparable items in fiscal 2010 and 2009, selling, general, and administrative costs for fiscal 2010 remained relatively flat compared to $24.2 million or approximately 37 percent of revenue for fiscal 2009.
Research & Development Expenses
Research and development expenses consist of employee salaries and expenses related to development of software and systems. Research and development expenses were $6.5 million or approximately 9 percent of revenue for fiscal 2010 compared to $5.5 million or approximately 8 percent of revenue for fiscal 2009. Research and development expenses increased due to additional cost structure associated with the acquisition of Turnpike and costs associated with the development of new functionality for our fleet customers.
Interest Expense on Financing Activities
In connection with financing the acquisition of Turnpike, the Company issued convertible debt totaling $30.2 million. The convertible debt was converted into 10,066,667 shares of Series G preferred stock and warrants to purchase 3,020,000 common shares upon obtaining approval at the Annual Shareholder Meeting held February 17, 2010. The convertible debt carried an interest rate of 14% per annum. The non-cash interest expense recorded in fiscal 2010 associated with the convertible debt and the write off of the unamortized balance of prepaid financing fees associated with the retirement of several debt facilities was approximately $1.4 million.
Acquisition Related Interest and Mark to Market Expense
As part of the purchase price of Turnpike, the Company agreed to issue 833,333 shares of common stock of the Company, contingent on the approval by the shareholders at the Annual Shareholder Meeting. Additionally, the Company has committed to pay an earn out of up to an additional 2,500,000 shares of common stock subject to shareholder approval at the Annual Shareholder Meeting and contingent on Turnpike achieving certain performance goals for 2010, 2011, and 2012 fiscal years. Shareholder approval was received at the Annual Shareholder Meeting held February 17, 2010. The fair value of the common shares relating to the purchase price and contingent earn out common shares resulted in a non-cash interest charge of $0.4 million in fiscal 2010.
Net Interest Expense
Net interest and other expense decreased $1.1 million to $0.4 million in fiscal 2010, compared to net interest expense of $1.5 million in fiscal 2009. The decrease in interest expense was due to the retirement in fiscal 2010 of several debt facilities associated with our acquisition of GeoLogic Solutions, Inc. in fiscal 2008.
Income Taxes
Income tax expense of $50,000, relating to alternative minimum tax and other taxes in certain jurisdictions which could not be completely offset by previous net operating losses, was recorded in fiscal 2010. The Company does not have objectively verifiable positive evidence of future taxable income as
prescribed by ASC 740- Income Tax. Accordingly, we concluded that a full valuation allowance was appropriate. Realization of deferred tax assets is dependent on future taxable income during the periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income. The amount of the net deferred tax asset considered realizable could be increased in the future if we return to profitability and actual future taxable income is higher than currently estimated. At September 30, 2010, we had federal net operating loss carryforwards of approximately $50.8 million.
The Company implemented the provisions of ASC 740 related to uncertain tax positions, effective October 1, 2007. The impact of the adoption on the Company’s consolidated financial statements was not material and no cumulative effect adjustment was recorded to the October 1, 2007 balance of accumulated deficit.
Net Loss to Common Shareholders
The Company incurred net losses to common shareholders of $3.2 million and $2.8 million for fiscal 2010 and 2009, respectively. Net loss to common shareholders reflects preferred stock dividends and preferred stock deemed dividends of $1.9 million and $0.7 million for fiscal 2010 and 2009, respectively. For fiscal 2010, preferred stock deemed dividends includes $1.7 million related to the beneficial conversion associated with the issuance of Series G preferred stock. For fiscal 2009, preferred stock deemed dividends includes $0.5 million related to beneficial conversion associated with the issuance of Series F preferred stock. Fiscal 2010 and 2009 reflect preferred stock dividends and preferred stock deemed dividends of $0.2 million and $0.2 million, respectively, relating to Series B Preferred Stock.
Liquidity and Capital Resources
As of September 30, 2010, we held $13.4 million in cash and cash equivalents and had working capital, which is total current assets less total current liabilities, of $15.2 million. This compared to $3.4 million in cash and cash equivalents, and working capital of $3.3 million, as of September 30, 2009. The increase in working capital is largely due to the $1.8 million of cash provided by operating activities and $10.2 million in net proceeds from the issuance of convertible debt, which was converted into Series G preferred stock, net of amounts paid for the acquisition of Turnpike, a patent litigation settlement, and retirement of several debt facilities associated with our acquisition of GeoLogics Solutions, Inc. in fiscal 2008.
Operating activities provided cash of $1.8 million during fiscal 2010 compared to $2.6 million in fiscal 2009. The decrease in cash provided by operating activities in fiscal 2010 was driven by $3.8 million improvement in cash net loss (net loss adjusted for non-cash items such as depreciation, amortization, loss on the sale of assets and non-cash charges associated with the convertible debt and Series G issuance) offset by additional working capital investment of $1.3 million in support of Turnpike growth and $3.3 million working capital investment for the organic business.
Cash used in investing activities of $11.9 million for fiscal 2010. This amount was driven by the acquisition of Turnpike and our investment in capital equipment.
The Company generated positive free cash flow from operations of $1.3 million (cash provided from operations less cash used in purchases of equipment and leasehold improvements less any acquisition and litigation related activity) in fiscal 2010 compared to $1.2 million in fiscal 2009.
Cash provided by financing activities was $20.0 million in fiscal 2010 compared to a use of cash of $6.7 million in fiscal 2009. This increase was largely driven by the $29.7 million of proceeds from the issuance of convertible debt which was converted into Series G preferred net of fees offset by the pay off of several debt facilities associated with the fiscal 2008 acquisition of GeoLogics Solutions, Inc.
The Company believes our existing funds and vendor terms will provide adequate cash to fund operating needs for the foreseeable future. However, it may be necessary to obtain additional funding in order to execute our non-organic growth strategy.
Our Series B Preferred Stock prohibits payment of dividends to the holders of any other capital stock unless and until we have paid dividends accrued on the Series B Preferred Stock, which pays an annual cumulative dividend of 4 percent of the original issue price. At the option of the Series B Preferred Stock holders, such dividends are payable in additional shares of Preferred Stock or cash. In fiscal 2010 and 2009, we issued 81,000 and 78,000 shares, respectively, of Series B Preferred Stock for payment of accrued dividends.
Subsequent Events
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 of $7.9 million in revenue and net new subscriptions of 10,875 were achieved and therefore expects to issue 809,993 shares of common stock to the former shareholders of Turnpike with the value of the remaining 23,340 shares being settled in cash of $70,000.
On September 30, 2010, the Company entered into a prepaid subscription agreement with Duke Capital, a former shareholder of Turnpike and owned in part by two employees of Turnpike. This agreement obligates the Company to provide hardware components and subscription service for 300 XATA Turnpike devices to Duke Capital for a period of 24 months. The total value of the agreement is $0.3 million, reflects non-cancelable terms and the full amount due over the contract term was prepaid by Duke Capital. Revenue will be recognized over the term of the agreement. The subscription of these 300 units was included in the calculation of the achievement of the fiscal 2010 earn-out goals and allowed the net new subscriptions goal to be met.
The Company has evaluated all subsequent events to ensure that this Annual Report on Form 10-K includes appropriate disclosure of events both recognized in the financial statements as of September 30, 2010, and events which occurred subsequent to September 30, 2010 but were not recognized in the financial statements.
Off-Balance Sheet Arrangements
Not applicable
Recently Issued Accounting Pronouncements
Fair Value Measurement and Disclosures (ASU 2010-06)
In January 2010, the FASB published ASU 2010-06 “Fair Value Measurements and Disclosures (Topic 820): - Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 clarifies improved disclosure requirement related to fair value measurements and disclosures - Overall Subtopic (Subtopic 820-10) of the FASB Accounting Standards Codification. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure about purchase, sales, issuances, and settlement in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of this standard did not have an impact on the Company’s financial position and results of operations.
Revenue Recognition (ASU 2009-13 and ASU 2009-14)
In October 2009, the FASB issued the following ASUs: ASU No. 2009-13, Revenue Recognition (ASC Topic 605) - Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force and ASU No. 2009-14, Software (ASC Topic 985) - Certain Revenue Arrangements That Include Software Elements, a consensus of the FASB Emerging Issues Task Force.
ASU No. 2009-13: This guidance modifies the fair value requirements of ASC subtopic 605-25 Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” in addition to VSOE and VOE (now referred to as TPE standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted.
ASU No. 2009-14: This guidance modifies the scope of ASC subtopic 965-605 Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.
These updates require expanded qualitative and quantitative disclosures and are effective for fiscal years beginning on or after June 15, 2010. However, companies may elect to adopt as early as interim periods ended September 30, 2009. These updates may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company is currently evaluating the impact of adopting these updates on our consolidated financial statement.
Item 8.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of XATA Corporation
We have audited the accompanying consolidated balance sheets of XATA Corporation (a Minnesota corporation) (the “Company”) as of September 30, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of XATA Corporation as of September 30, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
December 13, 2010
XATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements
XATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands)
The accompanying notes are an integral part of these financial statements
XATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Notes to Consolidated Financial Statements
Note 1. Description of Business
XATA Corporation (the “Company”) develops markets and services fully integrated, onboard fleet management systems for the private and for-hire fleet segment of the transportation industry. The Company sells its products in the United States and Canada. The Company’s systems utilize proprietary software and related hardware components and accessories to capture, analyze, and communicate operating information that assists fleet management in improving productivity and efficiency.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Turnpike Global Technologies, Inc. and Turnpike Global Technologies LLC (combined “Turnpike”) and GeoLogic Solutions, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company derives its revenue from sales of monthly software subscriptions, software, systems and related services. The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 985-605 - Software - Revenue Recognition, ASC 605-10 - Revenue Recognition - Overall, and ASC 605-25 - Revenue Recognition - Multiple Element Arrangements. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.
Software revenue is recognized under ASC 985-605 and ASC 605-10 when (i) persuasive evidence of an arrangement exists (for example a signed agreement or purchase order), (ii) delivery has occurred, as evidenced by shipping documents or customer acceptance, (iii) the fee is fixed or determinable and payable within twelve months, and (iv) collectability is probable and supported by credit checks or past payment history.
With regard to software arrangements involving multiple elements, the Company allocates revenue to the software and services elements based on the fair value of each element with the residual amount allocated to the systems revenue which is recognized upon delivery. The Company’s determination of fair value relating to the software and services elements in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company’s assessment of VSOE for each element is either the price charged when the same element is sold separately or the price established by management if that item is not yet sold separately. The Company has analyzed all of the elements included in its multiple-element software arrangements and has determined that it has sufficient VSOE to allocate revenue to the services and software components of its arrangements. Accordingly, assuming all other revenue recognition criteria are met, revenue from the software component is recognized ratably over the applicable term.
With regards to arrangements involving multiple-elements that do not give customers the explicit contractual right to take possession of our software at any time during the hosting period, revenue is recognized in accordance with ASC 605-25. Under ASC 605-25, the hardware element must have stand alone value and the monthly service element must have objective and reliable evidence of the fair value. Revenue is allocated based on the fair value of each element as evidenced by VSOE. Such evidence consists primarily of pricing of multiple elements as if sold as separate products or services. When the fair value of any undelivered element included in a multiple-element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and/or services have been performed, or until we can objectively determine the fair value of all remaining undelivered elements.
Agreements that do not meet the requirements described in ASC 985-605 or ASC 605-25, results in the recognition of all revenue ratably over the term of the agreement.
Third-Party Reseller Agreements
The Company has contracted with various resellers in the US and Canada, collectively the “Resellers”, to allow for them to sell the XATA Turnpike application in combination with their own communication services. The customer contracts directly with the Resellers for the communication services and XATA Turnpike application. The customer is billed by and remits all payments to the Resellers. The Resellers then remit a set portion of revenues collected that relate to the XATA Turnpike application to the Company and retains the remainder as their own revenue. In accordance with ASC 605-45 - Revenue Recognition - Principal Agent Considerations, the Company records the revenue received from the Resellers net of the amounts retained by the Resellers.
Allowance for Doubtful Accounts
The Company grants credit to customers in the normal course of business. The majority of the Company’s accounts receivable is due from companies with fleet trucking operations in a variety of industries. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are typically due from customers within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company reserves for these accounts receivable by increasing bad debt expense when they are determined to be uncollectible. Payments subsequently received, or otherwise determined to be collectible, are treated as recoveries that reduce bad debt expense. The balance of the allowance accounts at September 30, 2010 and 2009 was $0.4 million.
Segment Reporting
The Company operates as a single reportable segment. The Company will evaluate additional segment disclosure requirements as it expands its operations or experiences changes in its business.
The Company’s Canadian subsidiary accounted for approximately 4% of the Company’s total revenue for fiscal 2010, and had $18.7 million of long-lived assets at September 30, 2010. The Company had no significant revenues from customers outside of the United States in fiscal 2009, and had no long-lived assets deployed outside of the United States at September 30, 2009.
Foreign Currency Translation
The financial statements with a functional currency other than the USD have been translated into USD using the current rate method. Assets and liabilities have been translated using the exchange rates at the balance sheet date. Income and expense amounts have been translated using the average exchange rates during the period. Translation gains or losses resulting from the changes in exchange rates have been reported as a component of accumulated other comprehensive income in the statements of changes in shareholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Presentation
Certain amounts from prior year’s financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on net loss to common shareholders or shareholders’ equity.
Cash and Cash Equivalents
Cash and cash equivalents included highly liquid investments in overnight sweep and money market accounts. Cash and cash equivalents include individual investment balances that are in excess of Federal Deposit Insurance Corporation insurance limits.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash equivalents and, accounts receivable. The Company’s cash equivalents consist of checking, overnight sweep, and money market accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts.
The majority of the Company’s accounts receivable is due from companies with fleet trucking operations in a variety of industries. In general, the Company does not require collateral or other security to support accounts receivable. Accounts receivable are typically due from customers within 30 days and are stated at amounts due from customers net of any allowance accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. To reduce credit risk, management performs ongoing evaluations of its customers’ financial condition.
Fair Value of Financial Instruments
Fair Value Hierarchy
ASC 820 - Fair Value Measurement and Disclosures, which the Company adopted for nonfinancial assets and liabilities as of October 1, 2009, establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The following tables set forth by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis at September 30, 2010, according to the valuation techniques we used to determine their fair values.
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, and capital lease obligations, approximate fair value. There were no such amounts at September 30, 2009.
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.
Debt Financing Costs
Debt financing costs are amortized to interest expense over the term of the related financing agreement on a straight-line basis, which approximates the effective interest method. The net carrying value of the debt financing costs was approximately $0.5 million as of September 30, 2009. In the first quarter of fiscal 2010, the Company paid the outstanding balance on its $8.0 million term loan and $0.5 million line of credit and charged the remaining unamortized balance of the related debt financing costs of $0.5 million to “Interest expense on financing activities” in the statement of operations.
Equipment and Leasehold Improvements
Purchased equipment and leased equipment under capital leases are stated at cost and depreciated using the straight-line method over estimated useful lives of approximately two to seven years. Leasehold improvements are amortized over the shorter of the remaining lease term at the time of purchase or their estimated useful lives (one to seven years). Depreciation for income tax reporting purposes is computed using accelerated methods.
Equipment and leasehold improvements consist of (in thousands):
Total depreciation expense included in selling, general, and administrative expense was approximately $1.6 million and $1.3 million for the years ended September 30, 2010 and 2009, respectively. Total depreciation expense included in cost of goods sold relating to leased XATA Turnpike equipment was $1.0 million and hosting assets was $0.2 million for the twelve months ended September 30, 2010.
Capitalized System Development Costs
System development costs incurred after establishing technological feasibility are capitalized as capitalized system development costs in accordance with Statement of ASC 985-20 - Software - Costs to Be Sold, Leased, or Otherwise Marketed. Costs that are capitalized are amortized to cost of goods sold beginning when the product is first released for sale to the general public. Amortization is at the greater of the amount computed using the ratio of current gross revenues for the product to the total of current and anticipated future gross revenues or the straight-line method over the estimated economic life of the product (two to five years). As of September 30, 2010 there was $0.4 million of capitalized development costs. At September 30, 2009 there were no capitalized development costs.
Product development costs that do not meet the capitalization criteria of ASC 985-20 are charged to research and development expense as incurred.
Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.
Goodwill
As of September 30, 2010, the Company had a goodwill balance of $17.1 million of which $3.0 million resulted from the Company’s acquisition of GeoLogic Solutions, Inc. on January 31, 2008 and $14.1 million resulted from the Company’s preliminary purchase price allocation for its acquisition of Turnpike on December 4, 2009. The Company records goodwill when the purchase price of net tangible and intangible assets acquired exceeds their fair value. In accordance with ASC 350-20 - Intangibles - Goodwill and Others, the Company reviews goodwill for impairment at least annually, on the first day of the fourth quarter, or more frequently if an event occurs indicating the potential for impairment. Goodwill is not amortized, but instead tested for impairment at the reporting unit level. The Company has one reporting unit. The annual goodwill impairment test is a two-step process. First, the Company determines if the carrying value of the related reporting unit exceeds fair value, which would indicate that goodwill may be impaired. If the Company determines that goodwill may be impaired, we compare the implied fair value of the goodwill to its carrying amount to determine if there is an impairment loss. The Company’s most recent review was completed in the fourth quarter of fiscal 2010 and concluded that no impairment existed.
The changes in the net carrying amount of goodwill for the twelve months ended September 30, 2010 are as follows:
Intangible Assets
Intangible assets are carried at cost less accumulated amortization. The Company amortizes the cost of identified intangible assets on a straight-line basis over their expected economic lives. In accordance with ASC 360-10 - Property, Plant, and Equipment - Overall, the Company reviews intangible assets that have finite useful lives when an event occurs indicating the potential for earlier impairment. The Company measures impairment losses related to long-lived assets based on the amount by which the
carrying amounts of these assets exceed their fair values. The Company measures fair value under ASC 360-10, which is generally based on the sum of the undiscounted future cash flows. The Company’s analysis is based on available information and on assumptions and projections it considers to be reasonable and supportable. The cash flow analysis considers the likelihood of possible outcomes and is based on the Company’s best estimate of projected future cash flows. If necessary, the Company performs subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.
Intangible assets subject to amortization were as follows as of September 30, 2010 (in thousands):
Based on the allocation of the purchase price for GeoLogic Solutions, Inc., intangible assets subject to amortization were as follows as of September 30, 2009 (in thousands):
Amortization expense was $2.6 million and $1.7 million for the twelve months ended September 30, 2010 and 2009, respectively. Future amortization expense, as of September 30, 2010, is expected to be as follows (in thousands):
Product Warranties
The Company sells its products with a limited warranty. The Company provides for estimated warranty costs in relation to the recognition of the associated revenue. Factors affecting the Company’s product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per
claim. The Company periodically assesses the adequacy of its product warranty liability based on changes in these factors.
At September 30, 2010 and 2009, the Company had accruals for product warranties of approximately $1.0 million and $1.8 million, respectively. These amounts are included in accrued expenses on the Company’s balance sheet.
Shipping Costs
Shipping costs, which are classified as a component of cost of goods sold, were approximately $0.3 million in fiscal 2010 and 2009. Customer billings related to shipping and handling fees are reported as revenue.
Advertising Costs
Advertising costs consist primarily of ad campaigns, catalog brochures, promotional items and trade show expenses and are expensed as incurred. Advertising costs, which are included in selling, general and administrative expenses, were approximately $1.1 million and $0.9 million in fiscal 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.
Stock-Based Compensation
The Company accounts for share-based employee compensation plans under the provisions of ASC 718 - Compensation - Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. The Company estimates the fair value of options granted using the Black-Scholes option valuation model and the assumptions shown in Note 9 to the financial statements. The Company estimates the volatility of the common stock at the date of grant based on a historical volatility rate, consistent with ASC 718. The decision to use historical volatility was based upon the lack of traded common stock options. The expected term is estimated consistent with the simplified method, as identified in ASC 718-10 - Compensation - Stock Compensation - Overall, for share-based awards granted during fiscal 2010 and 2009. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the options. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest. The fair value of options are amortized over the vesting period of the awards utilizing a straight-line method.
Major Customers
The Company had the following significant customers:
The Company sells large orders to individual fleets and may be dependent upon a few major customers each year whose volume of purchases is significantly greater than that of other customers. Although the Company has experienced growth in its customer base, it is still dependent on present customers’ continued hardware purchases to equip and upgrade their fleets, as well as recurring product revenue. Loss of any significant current customers or an inability to further expand its customer base would adversely affect the Company.
Major Suppliers
While current vendors are meeting the Company’s quality and performance expectations, the Company believes that a disruption in the supply of various system components, many of these are supplied by separate single vendors, would affect the Company’s ability to deliver finished goods and replacement parts.
Recently Issued Accounting Standards
Fair Value Measurement and Disclosures (ASU 2010-06)
In January 2010, the FASB published ASU 2010-06 “Fair Value Measurements and Disclosures (Topic 820): - Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 clarifies improved disclosure requirement related to fair value measurements and disclosures - Overall Subtopic (Subtopic 820-10) of the FASB Accounting Standards Codification. The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure about purchase, sales, issuances, and settlement in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The amendments in this update were effective for interim and annual periods ending on or after December 15, 2009, and needed to be applied on a retrospective basis. The adoption of this standard did not have an impact on the Company’s financial position and results of operations.
Revenue Recognition (ASU 2009-13 and ASU 2009-14)
In October 2009, the FASB issued the following ASUs: ASU No. 2009-13, Revenue Recognition (ASC Topic 605) - Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force and ASU No. 2009-14, Software (ASC Topic 985) - Certain Revenue Arrangements That Include Software Elements, a consensus of the FASB Emerging Issues Task Force.
ASU No. 2009-13: This guidance modifies the fair value requirements of ASC subtopic 605-25 Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” in addition to VSOE and VOE (now referred to as TPE standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted.
ASU No. 2009-14: This guidance modifies the scope of ASC subtopic 965-605 Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to
deliver the tangible product’s essential functionality.
These updates require expanded qualitative and quantitative disclosures and are effective for fiscal years beginning on or after June 15, 2010. However, companies may elect to adopt as early as interim periods ended September 30, 2009. These updates may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company will adopt these updates for fiscal 2011 and does not anticipate any significant impact on the consolidated financial statements.
Note 3. 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 years ended September 30, 2010 and 2009, the Company reported the following revenues and related cost of goods sold by type:
Software revenue includes monthly subscriptions from XATANET and XATA Turnpike solutions, and monthly fees from MobileMax and OpCenter product lines. Systems revenue includes hardware, warranty, repair, and activation revenue. Services revenue includes training, implementation, installation, and professional service revenue.
Cost of software consists of communication, hosting costs, and direct personnel costs related to network, infrastructure, and XATA Turnpike customer support. Cost of systems consists of the direct product costs, warranty costs, product repair costs, and direct personnel costs related to XATANET and MobileMax technical support. Cost of services consists of third party vendor costs and direct costs related to service personnel.
Note 4. Acquisition of Turnpike Global Technologies, Inc. and Turnpike Global Technologies LLC
On December 4, 2009, the Company acquired all of the outstanding equity of Turnpike for a purchase price at closing consisting of $10.0 million in cash and 833,333 shares of common stock of the Company.
Additionally, the Company committed to pay total earn-outs up to an additional 2,500,000 shares of common stock upon achievement by Turnpike of certain performance goals for 2010, 2011, and 2012 fiscal years. All share related activity required shareholder approval. On February 17, 2010 the Company’s shareholders approved the transaction and common shares totaling 809,993 were issued to the shareholders of Turnpike, with the value of the remaining 23,340 shares being settled in cash of $70,000 to non-accredited U.S. holders. Prior to shareholder approval, the fair value of the common shares and contingent earn out was recorded as long term obligations of the Company with periodic re-measurement of fair value. The imputed interest on the common shares and the mark to market adjustment for the earn-outs has been shown as “Acquisition related interest and mark to market” on the statement of operations.
In connection with financing the acquisition of Turnpike, the Company issued convertible debt totaling $30.2 million. The convertible debt was converted into 10,066,663 shares of Series G preferred stock and warrants to purchase 3,019,995 common shares (with an exercise price of $3.00 per share) on February 19, 2010, subsequent to shareholder approval. The convertible debt carried an interest rate of 14% per annum. The Company used proceeds from the convertible debt for the purchase of Turnpike, payment of transaction costs, pay off of the term loan with Partner’s for Growth II, L.P. (“PFG”) of $8.0 million and to pay a litigation settlement. The remaining proceeds are being utilized for working capital needs and future growth. The interest on the convertible debt while it was outstanding has been included in “Interest expense on financing activities” on the statement of operations.
The components of the purchase price and the preliminary allocation to the assets and liabilities based on their estimated fair values at the date of acquisition are as follows (in thousands):
The following unaudited pro forma results of operations are presented to illustrate the estimated effects of the Company’s equity raise and acquisition of Turnpike on the Company’s historical results of operations. The pro forma adjustments are based on the preliminary information available at the time of the preparation of this document. The unaudited pro forma consolidated results of operations are for comparative purposes only and are not necessarily indicative of results that would have occurred had the acquisition been consummated as of the beginning of the periods presented, nor are they necessarily indicative of future results.
Unaudited pro forma results of operations for the twelve months ended September 30, 2010 and 2009, as if the equity raise, debt pay offs, acquisition of Turnpike, shareholder approval, and conversion of the convertible debt and related beneficial conversion all occurred at the beginning of the period indicated are as follows (in thousands, except per share amounts):
Note 5. Financing Arrangements
Debt obligations consist of the following (in thousands):
In connection with the financing of the acquisition of GeoLogic Solutions, Inc., the Company entered into a three-year secured credit facility with Silicon Valley Bank (“SVB”) consisting of a $10.0 million revolving line of credit bearing interest at a floating rate equal to 0.5% over SVB’s Prime Rate. Also in connection with the acquisition of GeoLogic Solutions, Inc., the Company entered into a four year secured credit facility consisting of an $8.0 million term loan with Partner’s for Growth II, L.P. (“PFG”) bearing interest at a fixed rate of 14.5%, subject to adjustment under various circumstances. The balances outstanding were $0.5 million and $8.0 million at September 30, 2009, for the revolving line of credit and term loan, respectively. In the first quarter of fiscal 2010 both facilities were paid in full and subsequently canceled.
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 during twelve months ended September 30, 2010 was approximately $0.9 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 reporting period and on the date of shareholder approval. Charges for this re-measurement were approximately $0.4 million for the twelve months ended September 30, 2010. The portion of the earn-out to be settled in cash will continue to be re-measured at fair value at the end of each reporting 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 XATA Turnpike product offerings. The Master Lease Agreement has a term of 3 years with a renewal option for an additional 3 year term. 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 balance of the Company’s capital lease obligation with BCCL was $1.1 million at September 30, 2010.
Note 6. Net Loss Per 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 3.4 million shares of common stock outstanding at September 30, 2010 and 4.2 million shares of common stock outstanding as September 30, 2009 were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.
Note 7. Income Taxes
The Company’s deferred tax assets and liabilities are as follows (amounts in thousands):
The Company periodically reviews the valuation allowance it has established on its deferred tax assets. Realization of deferred tax assets is dependent upon sufficient future taxable income during periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income. The Company has incurred net operating losses since inception, but has not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements. Given the Company’s history of losses and the uncertainty of projecting future taxable income, the Company has provided a full valuation allowance against its domestic deferred tax assets at September 30, 2010 and 2009. The amount of the net deferred tax asset considered realizable could be increased in the future if the Company returns to profitability and actual future taxable income is higher than currently estimated, and it becomes more likely than not that these amounts would be realized.
The Company’s income tax expense (benefit) differed from the statutory federal rate as follows (amounts in thousands):
As of September 30, 2010, the Company had federal net operating loss carryforwards and tax credit carryforwards of approximately $50.8 million and $1.9 million, respectively, which begin to expire in 2010 through 2029. Approximately $31.1 million of net operating loss carryforwards were acquired with the acquisition of GeoLogic Solutions, Inc.; however, the usage of these net operating losses is limited in accordance with the provisions of Section 382 of the Internal Revenue Code. Accordingly, only approximately $18.6 million of the acquired net operating loss carryforwards are available for use and are included in the $38.3 million carryforward amount. Pursuant to a Section 382 Study, the remaining $19.7 million of net operating loss carryforwards from Xata Corporation are not subject to annual use limitations.
In 2009 and 2010, the Company recognized no tax benefit or liabilities for uncertainties related to prior and current year income tax positions, which were determined to be immaterial.
The Company currently has no income tax payable balance for unrecognized tax benefits, and accordingly, there is no interest or penalties recorded on the balance sheet for such items. However, as discussed above, the value of GeoLogic Solutions, Inc. net operating loss carryforwards have been reduced by $12.5 million based on limitations on their use pursuant to Section 382 of the Internal Revenue Code. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the appropriate state income taxing authorities from 1994 to 2009 due to the net operating loss carryforwards from those years.
Note 8. Commitments
Leases
The Company leases its offices, warehouse, and certain office equipment under noncancelable operating leases, which generally have escalating rentals over the term of the lease. The facility leases require that the Company pay a portion of the real estate taxes, maintenance, utilities and insurance.
Approximate future minimum rental commitments, excluding common area costs under these non-cancelable operating leases, as of September 30, 2010 are (in thousands):
Rental expense, including common area costs, was approximately $1.5 million and $1.6 million for the fiscal years ended September 30, 2010 and 2009.
401(k) Plan
The Company has a 401(k) plan covering substantially all U.S. employees and the plan is operated on a calendar year basis. The Company provides an employer matching contribution equal to 50% of an employee’s contribution for employee deferrals of up to 6% of their compensation. Matching contributions for the fiscal years ended September 30, 2010 and 2009 totaled $0.4 million.
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 September 30, 2010, the Company believes that all commitments made will be achieved over the terms established.
Note 9. Shareholders’ Equity
Common Stock
The Company is authorized to issue up to 100,000,000 shares of common stock.
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’s Board of Directors authorized the sale of up to 1,700,000 shares of Series B Preferred Stock through a private placement. Pursuant to a Stock Purchase Agreement entered into in December 2003 with Trident Capital, Inc. and its affiliates (collectively, “Trident”) the Company sold 1,613,000 shares of Series B Preferred Stock for $4.1 million, or $2.54 per share. Each share of the Preferred Stock is convertible into one share of the Company’s common stock. The price per share of the Series B Preferred Stock and the conversion price for the common stock were equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series B Preferred Stock pays an annual cumulative dividend of 4 percent of the original issue price (payable semi-annually; payable in additional shares of Series B Preferred Stock
or cash, at the option of the holders) and has a non-participating preferred liquidation right equal to the original issue price, plus accrued unpaid dividends. The Series B Preferred Stock provides that the Company cannot pay dividends to the holders of any other capital stock unless and until the Company has paid dividends accrued on the Series B Preferred Stock.
In fiscal 2010 and 2009 the Company issued 81,000 and 78,000 shares, respectively, of Series B Preferred Stock to Trident for payment of accrued dividends. Based on the market value of the Company’s common stock on the date of the dividend payment, the payment of the dividend in additional shares of Series B Preferred Stock resulted in a non-cash dividend of $0.2 million in each of fiscal 2010 and 2009.
The Series B Preferred Stock is redeemable at the option of Trident at 100 percent of the original purchase price plus accrued and unpaid dividends at any time after five years from the date of issuance, or at any time if there is a significant adverse judgment against the Company, the Company defaults on its debts or files for bankruptcy, or in the event of a change of control. However, the Company may decline to redeem any or all of the Preferred Stock at its sole option and discretion, and in such case the annual cumulative dividend on the Series B Preferred Stock will increase from 4 percent to 10 percent. In the event that upon a change of control the Company does not have sufficient funds to redeem any or all of the Preferred Stock the annual cumulative dividend on the Series B Preferred Stock will increase from 4 percent to 6 percent. The Company may redeem the Series B Preferred Stock at its option after five years from the date of issuance if the market price of its common stock is greater than three times the conversion price on each of the sixty consecutive days prior to the redemption date.
Additionally, the Company issued Trident 5-year warrants for 451,000 shares of its common stock at an exercise price of $3.17 per share. The aggregate purchase price of the warrants was $56,000. The warrants permit “cashless exercise.”
In connection with this transaction, the Company recognized a one-time, non-cash deemed dividend of $0.6 million relating to the beneficial conversion portion of the preferred stock. The beneficial conversion portion was determined by allocating the Trident proceeds on a fair value basis between the preferred stock and the warrants. The amount of the deemed dividend was the difference between the deemed fair value of the Series B Preferred Stock and the purchase price on the date of the transaction. The deemed dividend was recorded as an addition to preferred stock with a corresponding increase to accumulated deficit. The addition was recognized at the date of issuance of the preferred stock, the same date at which the shares were eligible for conversion.
On December 6, 2003, the placement agent for the Trident investment received as consideration a $0.3 million cash fee and 7-year warrants for purchase of an aggregate of 163,000 shares of Common Stock (130,000 shares at $2.54 per share and 33,000 shares at $3.17 per share). These warrants permit “cashless exercise” and provide the holders with piggyback registration rights.
Series C
In August 2005, the Company’s Board of Directors authorized the sale of up to 1,400,000 shares of Series C Preferred Stock through a private placement. Pursuant to a Stock Purchase Agreement entered into in September 2005 with Trident, the Company sold 1,269,000 shares of Series C Preferred Stock for $5.0 million, or $3.94 per share. Each share of the Series C Preferred Stock is convertible into one share of the Company’s common stock. The price per share of Series C Preferred Stock and the conversion price for the common stock are equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series C Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in the Certificate of Designation of the Series C Preferred Stock). In that case, the Series C Preferred Stock pays an annual cumulative dividend of 4 percent of the original issue price (payable in cash). The Series C Preferred Stock has a non-participating liquidation right equal to the original issue price, plus accrued unpaid dividends which are senior to the Common Stock and
junior to the Series B Preferred Stock. The Company may redeem the Series C Preferred Stock at its option after five (5) 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 (3) times the then effective conversion price for a specified period.
Additionally, the Company issued Trident 5-year warrants to purchase 375,000 shares of its common stock at an exercise price of $3.94 per share. The aggregate fair value of the warrants was $47,000. The warrants permit “cashless exercise.”
In connection with this transaction, the Company recognized a one-time, non-cash deemed dividend of $0.4 million relating to the beneficial conversion portion of the preferred stock. The beneficial conversion portion was determined by allocating the Trident proceeds on a fair value basis between the preferred stock and the warrants. The amount of the deemed dividend was the difference between the deemed fair value of the Series C Preferred Stock and the purchase price on the date of the transaction. The deemed dividend was recorded as an addition to preferred stock with a corresponding increase to accumulated deficit. The addition was recognized at the date of issuance of the preferred stock, the same date at which the shares were eligible for conversion.
No broker or placement agent was involved in the placement of the Series C Preferred Stock and no commissions or other compensation was paid.
Series D
In May 2007, the Company’s Board of Directors authorized the sale of up to 1,600,000 shares of Series D Preferred Stock through a private placement. Pursuant to a Stock Purchase Agreement entered into in June 2007 with Trident, the Company sold 1,567,000 shares of Series C Preferred Stock for $6.0 million, or $3.83 per share. Each share of the Series D Preferred Stock is convertible into one share of the Company’s common stock. The price per share of Series D Preferred Stock and the conversion price for the common stock are equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series D Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in the Certificate of Designation of the Series D Preferred Stock). In that case, the Series D Preferred Stock pays an annual cumulative dividend of 4 percent of the original issue price (payable in cash). The Series D Preferred Stock has a non-participating liquidation right equal to the original issue price, plus accrued unpaid dividends which are senior to the Common Stock and junior to the Series B and Series C Preferred Stock. The Company may redeem the Series D Preferred Stock at its option after five (5) 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 (3) times the then effective conversion price for a specified period.
Additionally, the Company issued Trident 5-year warrants to purchase 470,000 shares of its common stock at an exercise price of $3.83 per share. The aggregate fair value of the warrants was $59,000. The warrants permit “cashless exercise.”
In connection with this transaction, the Company recognized a one-time, non-cash deemed dividend of $0.7 million relating to the beneficial conversion portion of the preferred stock. The beneficial conversion portion was determined by allocating the Trident proceeds on a fair value basis between the preferred stock and the warrants. The amount of the deemed dividend was the difference between the deemed fair value of the Series D Preferred Stock and the purchase price on the date of the transaction. The deemed dividend was recorded as an addition to preferred stock with a corresponding increase to accumulated deficit. The addition was recognized at the date of issuance of the preferred stock, the same date at which the shares were eligible for conversion.
No broker or placement agent was involved in the placement of the Series D Preferred Stock and no commissions or other compensation was paid.
Series E and Series F
In February 2009, the Company sold 1,355,857 shares of Series E Preferred Stock for $3.0 million, or $2.22 per share. Each share of the Series E Preferred Stock was converted into one share of the Series F Preferred Stock in April 2009 and the Certificate of Designation for the Series E Preferred Stock was cancelled. Each share of Series F Preferred Stock is convertible into one share of the Company’s common stock. The price per share of Series F Preferred Stock and the conversion price for the common stock are equal to the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series F Preferred Stock does not pay a dividend, unless the Company declines to redeem the stock upon demand of the holders after an Acceleration Event (as defined in the Certificate of Designation of the Series F Preferred Stock). In that case, the Series F Preferred Stock pays a cumulative dividend of 4 percent of the original issue price per annum on each outstanding share of Series F Preferred Stock (payable in cash). The Series F Preferred Stock has a non-participating liquidation right equal to the original issue price, plus accrued unpaid dividends, which is senior to the Company’s common stock and the Series B, Series C, and Series D Preferred Stock. The Company may redeem the Series F Preferred Stock at its option after five years from the date of issuance at the original issue price, plus accrued unpaid dividends, if the market value of the common stock is at least three times the then effective conversion price for a specified period.
Additionally, the Company issued 7-year warrants to purchase 406,759 shares of its common stock at an exercise price of $2.22 per share. Also in connection with this transaction, the Company extended by two years the term of each common stock warrant issued on September 15, 2005 (in connection with the purchase of the Company’s Series C Preferred Stock) and June 19, 2007 (in connection with the purchase of the Company’s Series D Preferred Stock), so that such warrants are now exercisable until the seventh anniversary (instead of the fifth anniversary) of the original date of issuance. The aggregate fair value of the warrants was $0.5 million, of which $0.1 million related to the modification of the Series C and Series D warrants. The warrants permit “cashless exercise.”
In connection with this transaction, the Company recognized a one-time, non-cash deemed dividend of $0.5 million relating to the beneficial conversion portion of the preferred stock. The beneficial conversion portion was determined by allocating the proceeds on a fair value basis between the preferred stock and the warrants. The amount of the deemed dividend was the difference between the deemed fair value of the Series E Preferred Stock and the purchase price on the date of the transaction. The deemed dividend was recorded as an addition to preferred stock with a corresponding increase to accumulated deficit. The addition was recognized at the date of issuance of the Series E Preferred Stock, the same date at which such shares were eligible for conversion.
No broker or placement agent was involved in the placement of the preferred stock and warrants in this transaction and no commissions or other compensation was paid.
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 Company’s 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 Company’s 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 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.
Stock Plans
In February 2007, the Company adopted the 2007 Long Term Incentive and Stock Option Plan (the 2007 Plan). The 2007 Plan permits the granting of “incentive stock options” meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as amended and nonqualified options that do not meet the requirements of Section 422. Stock appreciation rights, restricted stock awards, and restricted stock units may also be granted under the 2007 Plan. A total of 500,000 shares of the Company’s common stock were originally reserved for issuance pursuant to equity awards under the 2007 Plan. Subsequently, 1,000,000 shares were approved for addition to the 2007 Plan at the 2009 Annual Shareholders Meeting. The 2007 Plan has an evergreen provision in which the maximum number of shares that may be issued under the 2007 Plan shall be cumulatively increased on January 1, 2008 and on each January 1 thereafter for nine years by the lesser of (i) 500,000 Common Shares, (ii) 3% of the Company’s outstanding Common Shares, on an as-converted basis, as of the preceding December 31 and (iii) a number of Common Shares determined by the Board or Committee. The Company has 535,954 shares authorized and available for future equity awards as of September 30, 2010. Generally, the options that are granted under the 2007 Plan are exercisable for a period of ten years from the date of grant and vest over a period of up to three years from the date of grant.
The Company has three equity compensation plans: its 2001 Interim Incentive and Stock Option Plan, its 2002 Long-Term Incentive and Stock Option Plan and its 2007 Long-Term Incentive and Stock Option Plan, all of which have been approved by the shareholders of the Company. The 2001 Interim and 2002 Plans have terminated and no additional awards can be made under those Plans.
Stock Options
The following tables summarize information relating to stock option activity for fiscal 2010 and 2009 (in thousands, except per share amount):
Information regarding options outstanding and exercisable at September 30, 2010 is as follows (in thousands, except per share amount):
There were 2,000 options exercised during fiscal year 2010. Total intrinsic value of stock options exercised during fiscal year 2010 was $1,000. The intrinsic value of outstanding options and options exercisable was $0.3 million and $0.1 million, respectively, as of September 30, 2010.
On December 19, 2008, pursuant to and in accordance with the recommendation of the Compensation Committee (the “Committee”) of the Board of Directors of the Company, the Company extended the expiration date of all employee stock options previously issued under the 2007 Long-Term Incentive and Stock Option Plan and the 2002 Long-Term Incentive and Stock Option Plan from five years to ten years. No changes were made to any other terms of the stock options and the exercise prices remained the same. The total impact of this modification is that an additional $75,000 of compensation cost is being recognized ratably over the remaining vesting periods of the modified options.
The fair value of each option is estimated at the grant date using the Black-Scholes option-pricing model. The weighted average fair value at the date of grant and the assumptions used to determine such values are indicated in the following table (number of shares in thousands):
As of September 30, 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 1.45 years.
Restricted Stock Awards
The Company grants restricted shares of common stock as part of its long-term incentive compensation to employees. Fair market values of restricted stock awards are determined based on the closing market price on the date of grant. Restricted stock awards vest over one to three years and stock may be sold once vested. The Company also granted 18,000 and 15,000 shares of common stock to certain directors in fiscal 2010 and 2009, respectively. Restricted stock awards granted to directors vest immediately.
The following table summarizes information relating to restricted stock activity for fiscal 2010 and 2009 (in thousands, except per share amount):
The total fair value of shares vested during fiscal years 2010 and 2009 was $0.3 million and $0.5 million, respectively. The weighted average grant date fair value of restricted stock awards granted during fiscal years 2010 and 2009, respectively, was $3.06 and $3.24.
At September 30, 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 1.15 years.
Restricted Stock Units
The Company currently grants restricted units of common stock as part of its long-term incentive compensation to employees. The fair value of restricted stock units is determined based on the closing market price of the Company’s stock on the date of grant. Restricted stock units vest over a period of three years.
The following table summarizes information relating to restricted stock unit activity for fiscal 2010 (number of units in thousands):
At September 30, 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 1.57 years.
The total fair value of restricted stock units vested during fiscal year 2010 was $0.6 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 Company’s outstanding restricted stock units. As a result of this acceleration, the Company recognized a charge of $0.2 million.
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.
In fiscal 2009, the Company issued 407,000 warrants relating to the issuance of Series F Preferred Stock.
The following tables summarize information relating to stock warrants (amounts in thousands, with the exception of per warrant amounts):
Note 10. Legal Proceedings
XATA and its wholly owned subsidiary, Geologic Solutions, Inc. were named as defendants in two companion lawsuits in the United States District Court, Western District of North Carolina, Asheville Division. The plaintiffs allege against XATA and Geologic that Geologic created an unsafe product that permitted drivers to send and/or receive text messages while the vehicle is in motion. The plaintiffs claim damages in a nonspecific amount, but exceeding $75,000. In both cases the assigned U.S. Magistrate has recommended that the cases be dismissed. Those Orders have been appealed to the District Judge by plaintiffs and the parties are awaiting the Court’s orders.
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.
Note 11. Subsequent Events
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 of $7.9 million in revenue and net new subscriptions of 10,875 were achieved and therefore 809,993 shares of common stock will be issued to the former shareholders of Turnpike with the value of the remaining 23,340 shares being settled in cash of $70,000.
On September 30, 2010, the Company entered into a prepaid subscription agreement with Duke Capital, a former shareholder of Turnpike and owned in part by two employees of Turnpike. This agreement obligates the Company to provide hardware components and subscription service for 300 XATA Turnpike devices to Duke Capital for a period of 24 months. The total value of the agreement is $0.3 million, reflects non-cancelable terms and the full amount due over the contract term was prepaid by Duke Capital. Revenue will be recognized over the term of the agreement. The subscription of these 300 units was included in the calculation of the achievement of the fiscal 2010 earn-out goals and allowed the net new subscriptions goal to be met.
The Company has evaluated all subsequent events to ensure that this Annual Report on Form 10-K includes appropriate disclosure of events both recognized in the financial statements as of September 30, 2010, and events which occurred subsequent to September 30, 2010 but were not recognized in the financial statements.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the Company. Based on an evaluation of such disclosure controls and procedures as of the end of the period covered by this report, such officers have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2010 provided that the evaluation did not include an assessment of the effectiveness of the internal controls over financial reporting for the Turnpike operations which were acquired on December 4, 2009.
Management’s report on internal control over financial reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including the Certifying Officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. In accordance with the Securities and Exchange Commission’s published guidance, the Company’s assessment of internal control over financial reporting excluded the fiscal 2010 acquisition of Turnpike Inc., which represents approximately 9.3 percent of net sales for the year ended September 30, 2010. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of September 30, 2010.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Changes in internal controls over financial reporting. There have been no changes in the Company’s internal controls over financial reporting during its fourth fiscal quarter ended September 30, 2010, that have materially affected or are reasonably likely to materially affect such controls.
Item 9B.
Item 9B. Other Information
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The required information regarding our directors and executive officers and regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference from our definitive proxy statement, including the information under the headings “Proposal 1 - Election of Directors”, “Executive Compensation - Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” for the Annual Meeting of Stockholders.
We have adopted a Code of Ethics (Code) applicable to our principal executive, financial and accounting officers. The Code is posted on our website at www.xata.com, and we will post on such website any amendment to, or waiver from, a provision of our Code within four business days following the date of such amendment or waiver.
Item 11.
Item 11. Executive Compensation
Information called for by this Item is incorporated by reference from our definitive proxy statement, including the information under the heading “Executive Compensation”, for the Annual Meeting of Stockholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information called for by this Item is incorporated by reference from our definitive proxy statement, including the information under the headings “Equity Compensation Plan Information” and “Principal Shareholders and Ownership of Management” for the Annual Meeting of Stockholders.
Item 13.
Item 13. Certain Relationships and Related Transactions, Director Independence
Information called for by this Item is incorporated by reference from our definitive proxy statement, including information under the headings “Certain Relationships and Related Party Transactions” and “Proposal 1 - Election of Directors” for the Annual Meeting of Stockholders.
Item 14.
Item 14. Principal Accountant Fees and Services
Information called for by this Item is incorporated by reference from our definitive proxy statement, including the information contained under the heading “Audit Committee Report - Principal Accountant”, for the Annual Meeting of Stockholders.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) Documents Filed as Part of Form 10-K
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of September 30, 2010 and 2009
Consolidated Statements of Operations for the years ended September 30, 2010 and 2009
Consolidated Statements of Changes in Shareholders’ Equity for the years ended September 30, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended September 30, 2010 and 2009
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
3. Exhibits
The list of exhibits in the Exhibit Index is incorporated herein by reference.
(b) Exhibits
We hereby file the exhibits listed in the attached Exhibit Index.
(c) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Schedule II
XATA Corporation
Valuation and Qualifying Accounts
(in thousands)