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XATA CORP /MN/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[August 03, 2012]

XATA CORP /MN/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) Forward-looking Statements Except for the historical information contained herein, the matters discussed in this Report on Form 10-Q are forward-looking statements involving risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Numerous factors, risks and uncertainties affect the Company's operating results and could cause the Company's actual results to differ materially from forecasts and estimates or from any other forward-looking statements made by, or on behalf of, the Company, and there can be no assurance that future results will meet expectations, estimates or projections. Risks and uncertainties about us include, but are not limited to, the following: • As we have generated operating losses recently, additional operating losses may occur in the future and may be in excess of amounts that could be funded from operations, thus, we may be dependent upon external investment to support our operations during these periods; • Our growth and profitability depend on our timely introduction and market acceptance of new products, our ability to continue to fund research and development activities and our ability to establish and maintain strategic partner relationships; • We will have dependence on proprietary technology and communication networks owned and controlled by others, and accordingly, their problems may adversely impact us; and • For the foreseeable future, we are dependent upon existing customers continuing to utilize our solutions.



Further information regarding these and other risks is included in "Risk Factors" in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, in this Form 10-Q and in our other filings we make with the SEC.

Overview Xata Corporation and its wholly owned subsidiary (collectively, Xata, the Company, we, our or us) is one of the leading providers of fleet management solutions to the commercial trucking 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 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 commercial trucking 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. (GeoLogic) in 2008, Xata expanded its solutions to include the MobileMax product line, which provides wireless asset management solutions specifically designed to meet the needs of the for-hire segment of the commercial trucking industry.

During fiscal 2010, Xata acquired Turnpike Global Technologies, Inc. and Turnpike Global Technologies LLC (collectively, Turnpike). Turnpike enabled Xata to expand its addressable market to include fleets of all sizes ranging from large premier fleets to individual owner operators with a low cost, no upfront hardware cost solution.

Over the past 25 years, Xata has developed relationships with the nation's largest fleets including CVS Pharmacy, Dean Foods, Sysco, US Foods 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 gained relationships with additional customers such as Coca-Cola and Loblaws.

25 -------------------------------------------------------------------------------- Table of Contents During its history, Xata has remained steadfastly focused on providing its customers real-time data they can use to make better-informed decisions to improve their operations. Xata continues to be an industry innovator. As the first company to combine both driver and vehicle data with the power of mobile phones, Xata was the first in the industry to offer compliance applications on mobile devices.

Technology, People, Processes Xata utilizes a three-prong approach to meeting its customer's fleet management needs: • Technology. Xata provides total fleet management solutions, including hardware systems, software subscriptions and services, as applicable, through the following solutions: • XataNet integrates mobile technology, driver displays and cost-effective communications with a suite of powerful,web-based applications delivered on-demand via the Internet. XataNet provides critical real-time information about our customers' fleets, allows for paperless driver logs and provides summary and granularreports 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 communication devices.

• Xata Turnpike is a web-based fleet optimization solution that enables Xata to serve any size fleet requiring a simple, low-cost solution.

Unlike most onboard fleet management systems that utilize an expensive, in-cab system dependent on a cellular or satellite communication platform to transmit data, Xata Turnpiketransmits data via Bluetooth to a handset or tablet-based communication device that then sends the data to a Xata Turnpike portal which customers can access to view, sort and analyze their data. By utilizing off-the-shelf cell phones, smart phones, tablet computers and rugged handhelds as driver displays and communication devices, the majority of the traditional upfront hardware systems costs are eliminated.

• MobileMax assists for-hire carriers in managing nearly every aspect of their fleets' activities to help control costs and increase the return on investment. 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 also integrates with dispatching and routing applications for a seamless flow of information.

• People. With employee expertise in safety, fleet management and technology, Xata is able to provide consultation services to help organizations implement industry best practices and customized reporting.

• 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 includes assessing our customers' objectives and developing a detailed schedule that includes all aspects of the project, from implementation to conversion, integration, training and problem solving.

Critical Accounting Policies Our consolidated financial statements are prepared in accordance with the accounting principles generally accepted in the U.S. (GAAP) as set forth in the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the Securities and Exchange Commission (SEC). GAAP, as set forth within the ASC, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely, are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported 26-------------------------------------------------------------------------------- Table of Contents amounts of assets and liabilities as of the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our consolidated financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: • Revenue Recognition • Allowance for Doubtful Accounts • Goodwill and Intangible Assets - Impairment Assessments • Warranties • Accounting for Income Taxes In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result.

Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Board of Directors. There were no changes to the Company's critical accounting policies during the third quarter of fiscal 2012. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended September 30, 2011 for a more complete discussion of our critical accounting policies and estimates.

Results of Operations for the Three and Nine Months Ended June 30, 2012 and 2011 The following table sets forth detail related to revenue and cost of goods sold (in thousands): For the Three Months Ended For the Nine Months Ended June 30, June 30, 2012 2011 2012 2011 Revenue: Software $ 11,833 $ 11,381 $ 35,222 $ 34,102 Hardware systems 3,480 4,875 11,568 11,507 Services 329 768 1,312 2,134 Total revenue $ 15,642 $ 17,024 $ 48,102 $ 47,743 For the Three Months Ended For the Nine Months Ended June 30, June 30, 2012 2011 2012 2011 Cost of goods sold: Software $ 3,488 $ 2,878 $ 10,098 $ 8,348 Hardware systems 3,955 5,305 12,499 12,515 Services 572 936 1,903 2,578 Other - - - (21 ) Total cost of goods sold $ 8,015 $ 9,119 $ 24,500 $ 23,420 27 -------------------------------------------------------------------------------- Table of Contents Impairment and Business Realignment Charges During the third quarter, the Company recorded $5.7 million of impairment and business realignment charges as it transitions to developing mobile-based solutions. The fiscal 2012 business realignment charges included $0.9 million in personnel expenses from a workforce reduction, $0.4 million for accelerated depreciation of fixed assets, $0.6 million to write off excess and obsolete inventory and $0.3 million in estimated costs to terminate inventory purchase commitments. The Company also recorded a non-cash impairment charge of $3.5 million associated with intangible assets originally recorded in conjunction with the 2008 acquisition of Geologic.

Revenue Total revenue decreased 8.1 percent to $15.6 million for the three months ended June 30, 2012, compared to $17.0 million for the same period in fiscal 2011. The decrease was driven by a reduction in hardware revenue, principally driven by the increase in the number of customers adopting the no upfront hardware cost Xata Turnpike solution. Total revenue increased 0.8 percent to $48.1 million for the nine months ended June 30, 2012, compared to $47.7 million for the same period in fiscal 2011. The increase for the nine month period was driven by growth in software revenue as the Company continues to grow its customer base.

Software revenue, which includes monthly subscriptions from the XataNet and Xata Turnpike solutions, embedded leasing charges on Xata Turnpike solutions (where the customer selected the no upfront hardware cost option), monthly fees from the MobileMax solution and activation fees, increased 4.0 percent to $11.8 million for the three months ended June 30, 2012, compared to $11.4 million for the same period in fiscal 2011. The increase in software revenue was driven by revenue growth of 7.5 percent and 31.4 percent for XataNet and Xata Turnpike, respectively, compared to the same period in fiscal 2011. Software revenue for the three months ended June 30, 2012 represented 75.6 percent of total revenue, compared to 66.9 percent for the same period of fiscal 2011. The increase in software revenue was driven by continued growth in the XataNet and Xata Turnpike customer bases, as well as an increase in the Xata Turnpike average rate per unit.

Hardware systems revenue, which includes hardware with embedded software and, for the XataNet solution, software that can be hosted by the customer, warranty and repair revenue, decreased 28.6 percentage points to comprise 22.2 percent of total revenue for the three months ended June 30, 2012, compared to 28.6 percent for the same period in fiscal 2011. This decline is attributable to a continued increase in the number of customers adopting the no upfront hardware cost Xata Turnpike solution, rather than the hardware systems-based XataNet and MobileMax solutions.

Services revenue decreased 57.2 percent to comprise 2.1 percent of total revenue for the three months ended June 30, 2012, compared to 4.5 percent for the same period in fiscal 2011. The continued shift in the customer base to the Xata Turnpike solution, which provides for self installation, coupled with a trend in which XataNet customers are electing to become certified in the installation process has driven the decrease in services revenue.

Cost of Goods Sold and Gross Margin Cost of software consists of communication, hosting costs, depreciation of Xata Turnpike RouteTracker units (where the customer selected the no upfront hardware cost option) and direct personnel costs related to network infrastructure, as well as Xata Turnpike customer support. Cost of software increased 21.2 percent for the three months ended June 30, 2012, compared to the same period in fiscal 2011. Software margins were impacted by $0.4 million of the aforementioned business realignment charges, as well as increased depreciation of equipment used in the Xata Turnpike solution as the Company continues to grow the number of Xata Turnpike subscribers who have selected the no upfront cost hardware option.

Cost of hardware systems consists of the direct product costs, warranty costs, product repair costs and direct personnel costs related to XataNet and MobileMax technical support. Cost of hardware systems decreased 25.4 percent for the three months ended June 30, 2012, compared to the same period in fiscal 2011 in response to the 28 -------------------------------------------------------------------------------- Table of Contents shift in the Company's customer base to the no upfront hardware cost Xata Turnpike solution. Hardware systems gross margins were negatively impacted by the recording of $0.6 million to write off excess and obsolete inventory and $0.3 million in estimated costs to terminate inventory purchase commitments for the three months ended June 30, 2012. Favorability in the Company's warranty activity has served as the primary driver of the offset to the impact of the realignment charges.

Cost of services consists of third-party vendor costs and direct costs related to services personnel. Cost of services decreased 38.9 percent for the three months ended June 30, 2012, compared to the same period in fiscal 2011. Service gross margins decreased 52.0 percentage points for the three months ended June 30, 2012, compared to the same period in fiscal 2011. The decrease in the services margins was attributable to the decrease in our higher margin professional services offerings due to timing of customer-requested projects and lower utilization of services personnel compared to the same period in fiscal 2011.

Selling, General and Administrative Expenses Selling, general and administrative expenses consist of personnel costs for the Company's 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 $6.6 million or 42.1 percent of revenue and $5.8 million or 34.3 percent of revenue for the three months ended June 30, 2012 and 2011, respectively. The increase was primarily attributable to the recording of $0.8 million of employee separation costs from the workforce reduction. For the nine months ended June 30, 2012 and 2011, selling, general and administrative expenses were $19.3 million and $18.6 million, respectively.

Research & Development Expenses Research and development expenses consist of personnel costs and expenses related to development of new solutions and added functionality on existing solutions. Research and development expenses were $4.0 million or 25.5 percent of revenue for the three months ended June 30, 2012, compared to $2.7 million or 15.8 percent of revenue for the same period in fiscal 2011. For the nine months ended June 30, 2012, research and development expenses were $11.0 million or 22.8 percent of revenue, compared to $7.2 million or 15.0 percent of revenue for the same period in fiscal 2011. The increases reflect our commitment to enhance functionality to meet our customers' compliance and fleet optimization needs. We believe that leveraging new mobile technology is critical to our future success.

Net Interest and Other Expense Net interest and other expense was $33,000 for the three months ended June 30, 2012, compared to $93,000 for the same period in fiscal 2011. The decrease in net interest expense reflects a combination of lower average outstanding debt balances, as well as lower interest rates on the Company's revolving line of credit, compared to the capital lease facility previously used to finance certain equipment used in the Xata Turnpike solution. Net interest and other expense was $0.3 million for each of the nine months ended June 30, 2012 and 2011.

Income Taxes Our effective tax rate was 3.0 percent for the third quarter of fiscal 2012, compared to 39.9 percent for the same period in fiscal 2011. The lower tax rate for the third quarter of 2012 was due to the mix of taxable income among various tax jurisdictions. Specifically, the income tax benefit of $0.2 million recorded for the three months ended June 30, 2012, served to recognize the tax benefits relating to tax credits and net operating losses of Canadian operations to the extent benefits would offset the deferred tax liability.

The domestic operations recorded an income tax expense of $51,000 for the nine months ended June 30, 2012 in the accompanying statements of consolidated operations related to certain states and municipalities. Domestically the Company does not have objectively verifiable positive evidence of future taxable income as prescribed by 29 -------------------------------------------------------------------------------- Table of Contents ASC 740-10, Income Taxes - Overall. Accordingly, the Company concluded that a valuation allowance of the domestic deferred tax assets is appropriate. The realization of the domestic 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 the Company returns to profitability and it becomes more likely than not that these amounts would be realized. As of September 30, 2011, the Company had federal net operating loss carryforwards and tax credit carryforwards available for use of $39.7 million and $2.0 million, respectively.

Net Loss to Common Shareholders The Company reported a net loss to common shareholders of $6.3 million for the three months ended June 30, 2012, which included a non-cash intangible asset impairment charge of $3.5 million and business realignment charges of $2.2 million, compared to a loss of $0.5 million for the same period of fiscal 2011.

The Company reported net loss to common shareholders of $10.2 million for the nine months ended June 30, 2012, compared to a loss of $1.4 million for the same period of fiscal 2011. The increase in the net loss to common shareholders recorded through the first nine months of fiscal 2012 reflects the Company's continued investment in research and development activities as it transitions to mobile-based solutions, as well as the recording of $5.7 million of impairment and business realignment charges.

The net losses to common shareholders reflect net preferred stock dividends and preferred stock deemed dividends of $0.1 million and $32,000 for the three months ended June 30, 2012 and 2011, respectively, and $0.1 million for each of the nine months ended June 30, 2012 and 2011, respectively.

Liquidity and Capital Resources Cash used by operating activities was $0.3 million during the nine months ended June 30, 2012, compared to cash provided by operating activities of $4.9 million for the same period in fiscal 2011. Cash used by operating activities increased by $5.3 million, compared to the same period in fiscal 2011 as the result of an increase in research and development expenditures associated with development of mobile-based solutions, as well as an increase in working capital needs.

Cash used in investing activities was $2.5 million for the nine months ended June 30, 2012, compared to $2.3 million for the same period in fiscal 2011.

During fiscal 2012, the transition to purchase RouteTracker hardware units rather than financing through a capital lease facility represented a $0.6 million usage of cash, with the remaining expenditures relating to the Company's continued capital investment in its SaaS infrastructure.

Cash used by financing activities was $1.6 million for the nine months ended June 30, 2012, compared to $0.9 million for the same period in fiscal 2011. The increase reflects the early extinguishment of the capital lease facility previously used to finance certain equipment used in the Xata Turnpike solution and the payment of financing costs, which were offset, in part, by the Company drawing on the revolving line of credit.

30-------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures As of June 30, 2012, Xata held $7.9 million in cash and cash equivalents and had $8.5 million of working capital. These balances compare to $12.4 million in cash and cash equivalents and working capital of $14.1 million as of September 30, 2011. The following table is a reconciliation of working capital from current assets and current liabilities, which are the most directly comparable financial measures calculated in accordance with GAAP (in thousands): June 30, September 30, 2012 2011 Current assets $ 21,676 $ 26,491 Current liabilities (14,837 ) (14,724 ) Net current assets 6,839 11,767 Current portion of deferred revenue net of deferred costs 1,679 2,294 Working capital $ 8,518 $ 14,061 Working capital is a non-GAAP financial measure that management uses to assess the Company's performance. Management believes working capital provides investors with an additional view of the Company's liquidity and ability to repay current obligations. Our calculation of working capital may not be comparable to similarly titled measures reported by other companies.

The Company believes that based on our current level of operations, our cash flow from operations, 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 an inorganic growth strategy.

Our Series B Preferred Stock prohibits payment of dividends to the holders of any other capital stock unless and until the Company has paid dividends accrued on the Series B Preferred Stock, which pays a cumulative dividend of 4.0 percent of the original issue price per annum (payable semi-annually) on each outstanding share of Series B Preferred Stock. At the option of the Series B Preferred Stockholders, such dividends are payable in additional shares of Series B Preferred Stock or cash. During the nine months ended June 30, 2012 and 2011, the Company issued 81,000 and 84,000 shares, respectively, of Series B Preferred Stock for payment of accrued dividends.

Recently Issued Accounting Standards See Note 1 in the Notes to Consolidated Financial Statements located in Part I, Item 1 of this Report.

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