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Significant Accounting Policies
 9 Months Ended
Jun. 30, 2011
Significant Accounting Policies [Abstract]  
Significant Accounting Policies
Note 1. Significant Accounting Policies
Presentation
The accompanying unaudited consolidated financial statements were prepared by Xata Corporation (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures made herein are adequate to make the information presented not misleading.
In the opinion of management, the consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the financial condition, results of operations, and cash flows for the periods presented. Results of operations for the periods presented are not necessarily indicative of results to be expected for any other interim period or for the full year. These consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto in its Form 10-K for the year ended September 30, 2010 and Annual Report to Shareholders filed with the SEC.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Turnpike Global Technologies, Inc. and Turnpike Global Technologies LLC (combined “Turnpike”) and GeoLogic Solutions, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Adoption of New Accounting Principles
In September 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and arrangements that include software elements (new accounting principles). The new accounting principles permitted prospective or retrospective adoption. As such, the Company elected prospective adoption of Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements (ASU 2009-13) and Accounting Standards Update 2009-14, Software (Topic 985)—Certain Revenue Arrangements that Include Software Elements (ASU 2009-14) during the first quarter of fiscal 2011. ASU 2009-13 amended existing accounting guidance for revenue recognition for multiple-element arrangements. To the extent a deliverable within a multiple-element arrangement is not accounted for pursuant to other accounting standards, including ASC 985-605, Software-Revenue Recognition, ASU 2009-13 establishes a selling price hierarchy that allows for the use of an estimated selling price (ESP) to determine the allocation of arrangement consideration to a deliverable in a multiple element arrangement where neither vendor-specific objective evidence (VSOE) nor third-party evidence (TPE) is available for that deliverable. ASU 2009-14 modifies the scope of ASC 985-605 to exclude tangible products containing software components and nonsoftware components that function together to deliver the product’s essential functionality. In addition, ASU 2009-14 provides guidance on how a vendor should allocate arrangement consideration to nonsoftware and software deliverables in an arrangement where the vendor sells tangible products containing software components that are essential in delivering the tangible product’s functionality. The adoption of the above referenced guidance did not have a significant impact on the manner in which the Company recognizes revenue and is not expected to have any significant impact in the future.
Revenue Recognition
The Company derives its revenue from sales of (1) software, which includes monthly subscriptions from the XataNet and Xata Turnpike solutions, monthly fees from the MobileMax solution and activation fees; (2) hardware systems, which includes hardware with embedded software, warranty and repair revenue; and (3) services, which includes training, implementation, installation and professional service revenue.
The Company sells its products in two ways: direct sales and channel sales. The Company’s direct sales include sales of the Company’s solutions primarily to fleet operators and logistics providers. The Company’s channel sales are driven from Company personnel working in tandem with partners to sell the Company’s products to fleets of all sizes and types.
The Company’s customers typically enter into multi-year agreements with automatic renewal features. Customers are provided the option to terminate their contract at any time, but must pay through the end of the governing contract, unless termination resulted from a performance issue driven by the Company. Historically Xata Turnpike customers operated under month-to-month contracts and were allowed to provide a 30-day termination notice. Beginning in fiscal 2011 Xata Turnpike direct customer contract renewals were for a minimum of a one-year term, with an automatic one-year renewal period, consistent with the Company’s historic practices.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss has been transferred. For most of the Company’s hardware systems, software license and service sales, these criteria are met at the time the hardware system is shipped and/or the services are provided. The Company recognizes revenue from the sale of a hardware system and software bundled with the hardware system that is essential to the functionality of the hardware system in accordance with revenue recognition accounting guidance for arrangements with multiple deliverables. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions: (1) standalone sales of software products; and (2) sales of software bundled with a hardware system, which is not essential to the functionality of the hardware system.
The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. In addition, revenue from MobileMax product lines are deferred and recognized ratably over the term of the agreement in accordance with ASC 985-605, Software-Revenue Recognition, as discussed further below.
Revenue Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements including tangible products that contain software essential to the tangible product’s functionality and undelivered software elements related to the tangible product’s essential software, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (1) vendor-specific objective evidence of fair value, if available, (2) third-party evidence of selling price if VSOE is not available, and (3) best estimate of the selling price if neither VSOE nor TPE is available (a description as to how the Company determined VSOE, TPE and ESP is provided below). The Company limits the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or the meeting of any specified performance conditions.
To determine the selling price in multiple-element arrangements, the Company established VSOE of selling price using the price charged for a deliverable when sold separately and for software subscriptions, based on the renewal rates offered to customers. For nonsoftware multiple-element arrangements, TPE is established by evaluating similar and interchangeable competitor products or services in standalone arrangements with similarly situated customers. If the Company is unable to determine the selling price because VSOE or TPE doesn’t exist, ESP is determined for the purposes of allocating the arrangement by considering several external and internal factors including, but not limited to, pricing practices, margin objectives, competition, geographies in which the Company offers its products and services, internal costs and stage of the product lifecycle. The determination of ESP is made through consultation with and approval by management, taking into consideration the Company’s go-to-market strategy. As the Company’s competitors’ pricing and go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes to the determination of VSOE, TPE and ESP. As a result, the Company’s future revenue recognition for multiple-element arrangements could differ materially from its results in the current period. Selling prices are analyzed on an annual basis or more frequently if significant fluctuations in the selling prices occur.
The Company has identified three deliverables in arrangements involving the sale of its XataNet and Xata Turnpike solutions including transactions which the customer purchases the Routetracker unit. The first deliverable is the hardware system, which includes the software that is essential to the functionality of the hardware system. The second deliverable is the monthly subscription that covers the communication charge related to the XataNet solution, hosting fees and continued support. The final deliverable includes certain services that may be requested by the customer. The Company has determined that each deliverable has stand alone value and the deliverables can be separated into multiple units of accounting. The Company has allocated revenue between the three deliverables using the relative selling price method based on the Company’s ESPs. Amounts allocated to the delivered hardware system and essential software are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to subscription, hosting fees, and other continued support are recognized on a straight-line basis over the term of the agreement with the customer. Finally, amounts allocated to the services are recognized upon performance.
The Company’s process for determining its ESP considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered by the Company in developing the ESPs include prices charged by the Company for similar offerings, the Company’s historical pricing practices and the life cycle of the hardware system. The Company may also consider additional factors as appropriate, including the pricing of competitive alternatives if they exist, and product-specific business objectives.
Revenue Recognition for Software Products
The Company accounts for multiple element arrangements that consist only of software or software-related products, which include the Company’s MobileMax solution, its Xata Turnpike solution including transactions which the customer selects the no up-front cost option, which results in the Company providing a Routetracker unit for no initial charge, as well as its add-on product offerings, in accordance with industry specific accounting guidance for software and software-related transactions, ASU 985-605. For such transactions, revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by VSOE. If the Company cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements, the Company uses the residual method to recognize revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.
Other Revenue Recognition Policies Applicable to Software and Nonsoftware Elements
Many of the Company’s software arrangements include services, such as implementation, installation, driver education and consulting services sold separately under engagement contracts and are included as a part of the Company’s services business. In certain instances, revenues from these arrangements are accounted for separately from new software revenues because the arrangements qualify as services transactions as defined in ASC 985-605. The more significant factors considered in determining whether the revenues should be accounted for separately include the nature of services (i.e. consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Revenues for the aforementioned services are generally recognized as the services are performed. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenues are deferred until the uncertainty is sufficiently resolved.
Finally, the Company has entered into agreements with various companies, which provide a mechanism for continued development, marketing and distribution of a wider variety of comprehensive solutions to meet the needs of the changing marketplace. The Company recognizes revenue generated under the aforementioned agreements in accordance with ASC 605-45 — Revenue Recognition — Principal Agent Considerations, based upon the terms of each partnership agreement.
Allowance for Doubtful Accounts
The Company grants credit to customers in the normal course of business. The majority of the Company’s accounts receivable are due from companies with fleet trucking operations in a variety of industries. Credit is extended based on an evaluation of a customer’s financial condition. Accounts receivable are typically due from customers within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company reserves for these accounts receivable by increasing bad debt expense when they are determined to be uncollectible. Payments subsequently received, or otherwise determined to be collectible, are treated as recoveries that reduce bad debt expense.
Foreign Currency Translation
The financial statements with a functional currency other than the U.S. Dollar have been translated into U.S. Dollars using the current rate method. Assets and liabilities have been translated using the exchange rates at the balance sheet date. Income and expense amounts have been translated using the average exchange rates during the period. Translation gains or losses resulting from the changes in exchange rates have been reported as a component of accumulated other comprehensive income in the statements of changes in shareholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments in overnight sweep and money market accounts. Cash and cash equivalents are in excess of Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses from excess balances in the past and does not expect to in the future.
Fair Value of Financial Instruments
The Company performs fair value measurements in accordance with the guidance provided by the FASB’s Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, the Company considers the principal or most advantageous market to transact and considers assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices for identical assets or liabilities in active markets;
Level 2 — Inputs other than Level 1 that are directly or indirectly observable in the marketplace; or
Level 3 — Unobservable inputs which are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.
The Company’s valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.
Assets and Liabilities Measured at Fair Value
The Company has money market fund assets and a contingent earn out liability to non-accredited U.S. shareholders carried at fair value. The following paragraphs provide additional information regarding the valuation of the aforementioned balances, on a recurring basis as of June 30, 2011 and September 30, 2010:
Money market funds — The Company maintained money market funds, which are included in cash and cash equivalents on the consolidated balance sheets of $14.2 million and $13.0 million as of June 30, 2011 and September 30, 2010, respectively. The valuation techniques used to measure the fair values of the Company’s money market funds, that were classified as Level 1, were derived from quoted market prices as substantially all of these instruments have maturity dates (if any) within one year from the date of purchase and active markets for these instruments exist. There were no material transfers in or out of Level 1 during the nine months ended June 30, 2011.
Contingent earn out liability —The Company’s valuation techniques used to measure the fair value of the contingent earn out was based on the stock price on the date of the Turnpike acquisition and the estimated probability of earn-out target achievements. The change in the contingent earn out liability, which is included in debt obligations on the consolidated balance sheets has been summarized in the rollforward below (in thousands):
         
Balance as of September 30, 2010
  $ 181  
Payments of earn out
    (70 )
 
     
Balance as of June 30, 2011
  $ 111  
 
     
Inventories
Inventories consist of finished goods which are stated at the lower of cost or market. Cost is determined using the average cost method, which approximates the first-in, first-out method.
Equipment, Leased Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of (in thousands):
                 
    June 30,     September 30,  
    2011     2010  
Office furniture and equipment
  $ 9,164     $ 5,558  
Leased equipment
    5,070       2,959  
Engineering and manufacturing equipment
    902       919  
Leasehold improvements
    2,538       2,452  
 
           
 
    17,674       11,888  
Less: accumulated depreciation
    (8,713 )     (6,090 )
 
           
Equipment and leasehold improvements, net
  $ 8,961     $ 5,798  
 
           
Depreciation expense included in selling, general and administrative expenses was approximately $0.6 million and $0.4 million for the three months ended June 30, 2011 and 2010, respectively, and was approximately $1.6 million and $1.1 million for the nine months ended June 30, 2011 and 2010, respectively. Depreciation on leased Xata Turnpike equipment is recorded as a cost of goods sold and was $0.4 million and $0.3 million for the three months ended June 30, 2011 and 2010, respectively, and $1.1 million and $0.7 million for the nine months ended June 30, 2011 and 2010, respectively.
Capitalized Software Development Costs
Hardware system development costs incurred after establishing technological feasibility are capitalized in accordance with ASC 350-40-35 — Internal-Use Computer Software Marketed Costs. Capitalized costs are amortized as a cost of goods sold beginning when the product is first released for sale to the general public. Amortization is computed using the ratio of current units sold to the total of current units sold and anticipated future unit sales of product utilizing the developed technology. As of June 30, 2011 and September 30, 2010, there was $0.4 million of capitalized development costs. Amortization of capitalized software is recorded as a cost of goods sold and was $6,600 and $8,700 for the three and nine months ended June 30, 2011, respectively.
Product development costs that do not meet the capitalization criteria of ASC 350-40-35 are charged to research and development expense as incurred.
Intangible Assets
Intangible assets subject to amortization were as follows as of June 30, 2011 (in thousands):
                                         
                            Foreign        
    Weighted                     Currency        
    Average Life             Accumulated     Translation        
    (years)     Cost     Amortization     Adjustment     Net  
Acquired customer contracts
    7.8     $ 14,900     $ (6,152 )   $ 119     $ 8,867  
Acquired technology
    7.0       2,700       (639 )     236       2,297  
Reseller relationships
    6.0       1,500       (414 )     128       1,214  
Trademark
    10.0       900       (149 )     81       832  
Other intangibles
    7.0       49       (24 )     —       25  
 
                             
Total
    7.7     $ 20,049     $ (7,378 )   $ 564     $ 13,235  
 
                             
Amortization expense included in selling, general and administrative expenses was approximately $0.6 million for each of the three months ended June 30, 2011 and 2010, and was approximately $1.7 million for each of the nine months ended June 30, 2011 and 2010, respectively. Amortization of acquired technology is recorded as a cost of goods sold and was $0.1 million and $0.1 million for the three months ended June 30, 2011 and 2010, respectively, and $0.3 million and $0.2 million for the nine months ended June 30, 2011 and 2010, respectively.
Future amortization expense, as of June 30, 2011, is expected to be as follows (in thousands):
         
Years ending September 30,        
2011
  $ 687  
2012
    2,749  
2013
    2,749  
2014
    2,749  
2015
    2,743  
Thereafter
    1,558  
 
     
Total expected amortization expense
  $ 13,235  
 
     
Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.
The Company has identified the net losses recorded in the prior three quarters as an indicator of potential impairment. The Company has evaluated these assets for impairment and has determined no impairment exists at June 30, 2011.
Goodwill
The changes in the net carrying amount of goodwill for the nine months ended June 30, 2011 were as follows (in thousands):
         
Balance at September 30, 2010
  $ 17,048  
Foreign currency translation adjustment
    863  
 
     
Balance at June 30, 2011
  $ 17,911  
 
     
As of June 30, 2011, the Company had a goodwill balance of $17.9 million of which $13.7 million resulted from the Company’s acquisition of Turnpike on December 4, 2009.
In accordance with ASC 350-20 — Intangibles — Goodwill and Others, the Company is required to assess the carrying amount of its goodwill for impairment annually or more frequently if an event occurs indicating the potential for impairment. The Company has one operating and reporting unit that earns revenues, incurs expenses and makes available discrete financial information for review by the Company’s chief operating decision maker. Accordingly, the Company completes its goodwill impairment testing on this single reporting unit.
Testing for goodwill impairment is a two step process. The first step screens for potential impairment. If there is an indication of possible impairment the Company must complete the second step to measure the amount of impairment loss, if any. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the Company’s market capitalization with the carrying value of its net assets. If the Company’s total market capitalization is at or below the carrying value of its net assets, the Company would perform the second step of the goodwill impairment test to measure the amount of impairment loss to record, if any. The Company considers goodwill impairment test estimates critical due to the amount of goodwill recorded on its balance sheet and the judgment required in determining fair value amounts.
Historically, the Company’s market capitalization has been well above the carrying value of its equity and there has been no indication of potential impairment. The results of the Company’s most recent annual assessment performed on the first day of the fourth quarter of fiscal 2010 did not indicate any impairment of its goodwill.
The Company has evaluated these assets for impairment and has determined no impairment exists at June 30, 2011.
Product Warranties
The Company sells its products with a limited warranty. The Company provides for estimated warranty costs in relation to the recognition of the associated revenue. Factors affecting the Company’s product warranty liability include the number of units sold, historical and anticipated rates of claims and cost per claim. The Company periodically assesses the adequacy of its product warranty liability based on changes in these factors.
At June 30, 2011 and September 30, 2010, the Company had accruals for product warranties of approximately $0.7 million and $1.0 million, respectively.
Shipping Costs
Shipping costs, which are classified as a component of cost of goods sold, were approximately $0.1 million for each of the three months ended June 30, 2011 and 2010. Shipping costs were approximately $0.3 million and $0.2 million for the nine months ended June 30, 2011 and 2010, respectively. Customer billings related to shipping and handling fees are reported as hardware systems revenue.
Advertising Costs
Advertising costs consist primarily of ad campaigns, catalog brochures, promotional items and trade show expenses and are expensed as incurred. Advertising costs, which are included in selling, general and administrative expenses, were $0.3 million for each of the three months ended June 30, 2011 and 2010. Advertising costs were $0.9 million and $0.8 million for the nine months ended June 30, 2011 and 2010, respectively.
Income Taxes
The Company accounts for income taxes following the provisions of ASC 740-10 — Income Taxes — Overall. ASC 740-10 requires that deferred income taxes be recognized for the future tax consequences associated with differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable earnings. Valuation allowances are established by the Company when necessary to reduce deferred tax assets to the amount more likely than not to be realized. The effect of changes in tax rates is recognized in the period in which the rate change occurs. An income tax benefit of $0.3 million was recorded for the three months and $0.5 million for the nine months ended June 30, 2011 to recognize tax benefits in Canada resulting from using net operating loss to offset the deferred tax liability.
Recently Issued Accounting Standards
Performing Step 2 of the Goodwill Impairment Test: In December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350) — Intangibles — Goodwill and Other. ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The Company will adopt ASU 2010-28 in fiscal 2012 and any impairment to be recorded upon adoption will be recognized as an adjustment to beginning retained earnings. The Company is currently evaluating the impact of the pending adoption of ASU 2010-28 on the consolidated financial statements.
Disclosure Requirements Related to Fair Value Measurements: In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRSs, which provides guidance clarifying how to measure and disclose fair value. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended. The Company is currently evaluating the impact of the pending adoption of ASU 2011-04 on the consolidated financial statements.
Presentation of Comprehensive Income: In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which serves to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact of the pending adoption of ASU 2010-28 on the consolidated financial statements.