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PWFL:Segments

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 001-39080

 

POWERFLEET, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   83-4366463
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

123 Tice Boulevard    
Woodcliff Lake, New Jersey   07677
(Address of principal executive offices)   (Zip Code)

 

(201) 996-9000

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.01 per share   PWFL   The Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No

 

The number of shares of the registrant’s common stock, $0.01 par value per share, outstanding as of the close of business on August 6, 2021 was 35,968,423.

 

 

 

 
 

 

INDEX

 

PowerFleet, Inc. and Subsidiaries

 

  Page
   
PART I - FINANCIAL INFORMATION 3
   
Item 1. Financial Statements 3
   
Condensed Consolidated Balance Sheets as of December 31, 2020 and June 30, 2021 (unaudited) 3
   
Condensed Consolidated Statements of Operations (unaudited) - for the three and six months ended June 30, 2020 and 2021 4
   
Condensed Consolidated Statements of Comprehensive Loss (unaudited) - for the three and six months ended June 30, 2020 and 2021 5
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) - for the periods January 1, 2020 through June 30, 2020 and January 1, 2021 through June 30, 2021 6
   
Condensed Consolidated Statements of Cash Flows (unaudited) - for the six months ended June 30, 2020 and 2021. 7
   
Notes to Unaudited Condensed Consolidated Financial Statements 8
   
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 25
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
   
Item 4. Controls and Procedures 35
   
PART II - OTHER INFORMATION 36
   
Item 1. Legal Proceedings 36
   
Item 1A. Risk Factors 36
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
   
Item 6. Exhibits 37
   
Signatures 38
   
Exhibit 31.1  
Exhibit 31.2  
Exhibit 32  

 

2
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

POWERFLEET, INC. AND SUBSIDIARIES

Condensed Balance Sheets

(In thousands, except per share data)

 

   December 31, 2020*   June 30, 2021 
       (Unaudited) 
ASSETS            
Current assets:            
Cash and cash equivalents  $ 18,127   $ 39,861 
Restricted cash    308     308 
Accounts receivable, net of allowance for doubtful accounts of $2,364 and $2,754 in 2020 and 2021, respectively    24,147     29,656 
Inventory, net    12,873     13,472 
Deferred costs - current    3,128     2,800 
Prepaid expenses and other current assets    6,184     6,909 
Total current assets    64,767     93,006 
             
Deferred costs - less current portion    2,233     1,163 
Fixed assets, net    8,804     8,866 
Goodwill    83,344     83,344 
Intangible assets, net    31,276     28,678 
Right of use asset    9,700     9,451 
Severance payable fund    4,056     4,062 
Deferred tax asset    1,506     1,005 
Other assets    3,115     3,177 
Total assets  $ 208,801   $ 232,752 
             
LIABILITIES            
Current liabilities:            
Short-term bank debt and current maturities of long-term debt    5,579     5,918 
Accounts payable and accrued expenses    20,225     23,563 
Deferred revenue - current    7,339     8,048 
Lease liability - current    2,755     2,190 
Total current liabilities    35,898     39,719 
             
Long-term debt, less current maturities    23,179     20,015 
Deferred revenue - less current portion    6,006     5,421 
Lease liability - less current portion    7,050     7,416 
Accrued severance payable    4,714     4,672 
Other long-term liabilities    674     739 
             
Total liabilities    77,521     77,982 
Commitments and Contingencies (note 21)            
             
MEZZANINE EQUITY            
Convertible redeemable preferred stock: Series A – 100 shares authorized, $0.01 par value; 55 and 55 shares issued and outstanding at December 31, 2020 and June 30, 2021    51,992     52,327 
             
Preferred stock; authorized 50,000 shares, $0.01 par value;    -     - 
Common stock; authorized 75,000 shares, $0.01 par value; 32,280 and 37,278 shares issued at December 31, 2020 and June 30, 2021, respectively; shares outstanding, 31,101 and 35,982 at December 31, 2020 and June 30, 2021, respectively    323     373 
Additional paid-in capital    206,499     234,165 
Accumulated deficit    (121,150)    (124,375)
Accumulated other comprehensive gain (loss)    399     68
Treasury stock; 1,179 and 1,296 common shares at cost at December 31, 2020 and June 30, 2021, respectively    (6,858)    (7,867)
             
Total Powerfleet, Inc. stockholders’ equity    79,213     102,364 
Non-controlling interest    75     79 
Total equity    79,288     102,443 
Total liabilities and stockholders’ equity  $ 208,801   $ 232,752 

 

*Derived from audited balance sheet as of December 31, 2020.

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3
 

 

POWERFLEET, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

   2020   2021   2020   2021 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2021   2020   2021 
                 
Revenues:                    
Products  $9,394   $15,466   $22,602   $26,886 
Services   16,371    18,082    33,962    35,653 
Total revenues   25,765    33,548    56,564    62,539 
                     
Cost of Revenues:                    
Cost of products   6,023    10,862    15,325    19,014 
Cost of services   5,699    6,641    12,330    13,010 
Total Cost of revenues   11,722    17,503    27,655    32,024 
                     
Gross profit   14,043    16,045    28,909    30,515 
                     
Operating expenses:                    
Selling, general and administrative expenses   12,166    13,421    27,269    27,029 
Research and development expenses   2,582    2,779    5,754    5,524 
Total Operating expenses   14,748    16,200    33,023    

32,553

 
                     
Loss from operations   (705)   (155)   (4,114)   (2,038)
Interest income   17    12    31    24 
Interest expense   (1,484)   (1,226   (1,339)   (669
Other (expense) income, net   5    (2   7    (2
                     
Net loss before income taxes   (2,167)   (1,371)   (5,415)   (2,685)
                     
Income tax benefit (expense)   (460)   (67)   (653)   (540)
                     
Net loss before non-controlling interest   (2,627)   (1,438)   (6,068)   (3,225)
Non-controlling interest   1    1    16    1 
                     
Net loss   (2,626)   (1,437)   (6,052)   (3,224)
Accretion of preferred stock   (168)   (168)   (336)   (336)
Preferred stock dividend   (972)   (1,028)   (1,927)   (2,056)
                     
Net loss attributable to common stockholders  $(3,766)  $(2,633)  $(8,315)  $(5,616)
                     
Net loss per share attributable to common stockholders - basic and diluted  $(0.13)  $(0.08)  $(0.28)  $(0.16)
                     
Weighted average common shares outstanding - basic and diluted   29,399    34,898    29,216    34,083 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4
 

 

POWERFLEET, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

   2020   2021   2020   2021 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2021   2020   2021 
                 
Net loss attributable to common stockholders  $(3,766)  $(2,633)  $(8,315)  $(5,616)
                     
Other comprehensive (loss) income, net:                    
                     
Foreign currency translation adjustment   406    1,003   (1,920)   (331
                     
Total other comprehensive income (loss)   406    1,003   (1,920)   (331
                    
Comprehensive loss  $(3,360)  $(1,630)  $(10,235)  $(5,947)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5
 

 

POWERFLEET, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(In thousands, except per share data)

(Unaudited)

 

  

Number of

Shares

   Amount   Additional Paid-in Capital   Accumulated Deficit   Other Comprehensive Income (Loss)   Treasury Stock   Non-controlling Interest   Stockholders’ Equity 
   Common Stock           Accumulated             
  

Number of

Shares

   Amount   Additional Paid-in Capital   Accumulated Deficit   Other Comprehensive Income (Loss)   Treasury Stock   Non-controlling Interest   Stockholders’ Equity 
                                 
Balance at January 1, 2021   32,280   $323   $206,499   $(121,150)  $399   $(6,858)  $75   $79,288 
                                         
Net loss attributable to common stockholders   -    -    (1,196)   (1,787)   -    -    -    (2,983)
Foreign currency translation adjustment   -    -    -    -    (1,334)   -    (2)   (1,336)
Issuance of restricted shares   415    4    (4)   -    -    -    -     - 
Forfeiture of restricted shares   (6)   -    -    -    -    -    -    - 
Vesting of restricted stock units   34         -    -    -    -    -    - 
Shares issued pursuant to exercise of stock options   129    1    716             -    -    -                 -           717 
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (347)   -    (347)
Shares withheld pursuant to exercise of stock options   -    -    -    -    -    (647)   -    (647)
Stock based compensation   -    -    1,357    -    -    -    -    1,357 
Common shares issued, net of issuance costs   4,428    44    26,822    -    -    -    -    26,866 
Balance at March 31, 2021   37,280   $372   $234,194   $(122,937)  $(935)  $(7,852)  $73   $102,915 
Net loss attributable to common stockholders   -    -    (1,195)   (1,438)   -    -    -    (2,633)
Net loss attributable to non-controlling interest   -    -    -    -    -    -    (1)   (1)
Foreign currency translation adjustment   -    -    -    -    1,003   -    7   1,010
Forfeiture of restricted shares   (14)   -    -    -    -    -    -    - 
Vesting of restricted stock units   -         -    -    -    -    -    - 
Shares issued pursuant to exercise of stock options   12    1    71    -    -    -    -    72 
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (15)   -    (15)
Stock based compensation   -    -    1,095    -    -    -    -    1,095 
Balance at June 30, 2021   37,278   $373   $234,165   $(124,375)  $68   $(7,867)  $79   $102,443 

 

  Common Stock           Accumulated             
  

Number of

Shares

   Amount   Additional Paid-in Capital   Accumulated Deficit   Other Comprehensive Income (Loss)   Treasury Stock   Non-controlling Interest   Stockholders’ Equity 
                                 
Balance at January 1, 2020   30,804   $308   $201,813   $(112,143)  $265   $(6,053)  $(10)  $84,180 
Net loss attributable to common stockholders   -    -    (1,123)   (3,426)   -    -                    -    (4,549)
Net loss attributable to non-controlling interest   -    -    -    -    -    -    (15)   (15)
Foreign currency translation adjustment   -    -    -    -    (2,326)   -    (20)   (2,346)
Issuance of restricted shares   40    -    -    -    -    -    -    - 
Forfeiture of restricted shares   (32)   -    -    -    -    -    -    - 
Vesting of restricted stock units   110    1    (1)   -    -    -    -    - 
Other   -         62    -    -    -    -    62 
Shares issued pursuant to exercise of stock options   90    1    382    -    -    -    -    383 
Shares withheld pursuant to exercise of stock options   -    -    -    -    -    (256)   -    (256)
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (232)   -    (232)
Stock based compensation   -    -    1,155    -    -    -    -    1,155 
Balance at March 31, 2020   31,012   $310   $202,288   $(115,569)  $(2,061)  $(6,541)  $(45)  $78,382 
Net loss attributable to common stockholders   -    -    (1,140)   (2,626)   -    -    -    (3,766)
Net loss attributable to non-controlling interest   -    -    -    -    -    -    (1)   (1)
Foreign currency translation adjustment   -    -    -    -    406    -    2    408 
Issuance of restricted shares   276    3    (3)   -    -    -    -    - 
Forfeiture of restricted shares   (12)   -    -    -    -    -    -    - 
Vesting of restricted stock units   17    -    -    -    -    -    -    - 
Shares issued pursuant to exercise of stock options   50    1    215    -    -    -    -    216 
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (16)   -    (16)
Common shares issued under the 2020 ATM   810    8    4,033    -    -    -    -    4,041 
Stock based compensation   -    -    1,012    -    -    -    -    1,012 
Balance at June 30, 2020   32,153   $322   $206,405   $(118,195)  $(1,655)  $(6,557)  $(44)  $80,276 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6
 

 

POWERFLEET, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands, except per share data)

(Unaudited)

 

   2020   2021 
   Six Months Ended June 30, 
   2020   2021 
         
Cash flows from operating activities            
Net loss  $ (6,052)  $ (3,224)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:            
Non-controlling interest    (16)    (1
Inventory reserve    126     135 
Stock based compensation expense    2,167     2,452 
Depreciation and amortization    4,050     4,231 
Right-of-use assets, non-cash lease expense    1,437     1,503 
Bad debt expense    543     531 
Deferred income taxes    653     540 
Other non-cash items    (35)    160 
Changes in:            
Accounts receivable    2,846     (6,355)
Inventory    1,111     (797)
Prepaid expenses and other assets    2,333    485 
Deferred costs    1,624     1,397 
Deferred revenue    (2,311)    962 
Accounts payable and accrued expenses    (2,683    2,637 
Lease liabilities    (1,496)    (1,453)
Accrued severance payable, net    118     - 
             
Net cash provided by operating activities    4,415     3,203 
             
Cash flows from investing activities:            
Proceeds from sale of property and equipment    35     - 
Capital expenditures    (822)    (1,454)
             
Net cash (used in) investing activities    (787)    (1,454)
             
Cash flows from financing activities:            
Net proceeds from stock offering    4,041     26,867 
Payment of preferred stock dividends    -     (2,056)
Repayment of long-term debt    (991)    (2,671)
Short-term bank debt, net    (357    93 
Proceeds from exercise of stock options, net    342     142 
Purchase of treasury stock upon vesting of restricted stock    (248)    (362)
             
Net cash provided by financing activities    2,787    22,013 
             
Effect of foreign exchange rate changes on cash and cash equivalents    (1,341)    (2,028)
Net (decrease) increase in cash, cash equivalents and restricted cash    5,074     21,734 
Cash, cash equivalents and restricted cash - beginning of period    16,703     18,435 
             
Cash, cash equivalents and restricted cash - end of period  $ 21,777   $ 40,169 
             
Reconciliation of cash, cash equivalents, and restricted cash, beginning of period            
Cash and cash equivalents    16,395     18,127 
Restricted cash    308     308 
Cash, cash equivalents, and restricted cash, beginning of period  $ 16,703   $ 18,435 
             
Reconciliation of cash, cash equivalents, and restricted cash, end of period            
Cash and cash equivalents    21,469     39,861 
Restricted cash    308     308 
Cash, cash equivalents, and restricted cash, end of period  $ 21,777   $ 40,169 
             
Supplemental disclosure of cash flow information:            
Cash paid for:            
Taxes    38     48 
Interest    934     757 
             
Noncash investing and financing activities:            
Value of shares withheld pursuant to exercise of stock options  $ 256   $ 647 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7
 

 

 

POWERFLEET, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2021

In thousands (except per share data)

 

NOTE 1 - DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION

 

Description of the Company

 

On October 3, 2019, PowerFleet, Inc. (together with its subsidiaries, “PowerFleet,” the “Company,” “we,” “our” or “us”) completed the acquisition of Pointer Telocation Ltd. (the “Transactions”), as a result of which I.D. Systems, Inc. (“I.D. Systems”) and PowerFleet Israel Ltd. (“PowerFleet Israel”) each became direct, wholly-owned subsidiaries of the Company and Pointer Telocation Ltd. (“Pointer”) became an indirect, wholly-owned subsidiary of the Company. Prior to the Transactions, PowerFleet had no material assets, did not operate any business and did not conduct any activities, other than those incidental to its formation and the Transactions. I.D. Systems was determined to be the accounting acquirer in the Transactions. As a result, the historical financial statements of I.D. Systems for the periods prior to the Transactions are considered to be the historical financial statements of PowerFleet and the results of Pointer have been included in the Company’s consolidated financial statements from the date of the Transactions.

 

The Company is a global leader and provider of subscription-based wireless Internet-of-Things (IoT) and machine-to-machine (M2M) solutions for securing, controlling, tracking, and managing high-value enterprise assets such as industrial trucks, tractor trailers, containers, cargo, and vehicles and truck fleets.

 

Impact of COVID-19

 

The global outbreak of a novel strain of coronavirus, COVID-19, and mitigation efforts by governments to attempt to control its spread, has resulted in significant economic disruption and continues to adversely impact the broader global economy. The extent of the impact on the Company’s business and financial results will depend largely on future developments that cannot be accurately predicted at this time, including the duration of the spread of the outbreak, the extent and effectiveness of containment actions and the impact of these and other factors on capital and financial markets and the related impact on the financial circumstances of our employees, customers and suppliers. As of the date of these unaudited consolidated financial statements, the full extent to which the COVID-19 pandemic may materially impact the Company’s business, results of operations and financial condition is uncertain.

 

Basis of presentation

 

The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the consolidated financial position of the Company as of June 30, 2021, the consolidated results of its operations for the three- and six-month periods ended June 30, 2020 and 2021, the consolidated change in stockholders’ equity for the three-month periods ended March 31 and June 30, 2020 and 2021 and the consolidated cash flows for the six-month periods ended June 30, 2020 and 2021. The results of operations for the three- and six-month periods ended June 30, 2021 are not necessarily indicative of the operating results for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K for the year then ended.

 

Reclassifications

 

Certain prior amounts have been reclassified to conform with the current year presentation for comparative purposes. These reclassifications had no effect on the previously reported results of operations.

 

8
 

 

Liquidity

 

As of June 30, 2021, the Company had cash and cash equivalents of $39,861 and working capital of $53,287. The Company’s primary sources of cash are cash flows from operating activities, its holdings of cash, cash equivalents and investments from the sale of its capital stock and borrowings under its credit facility. To date, the Company has not generated sufficient cash flows solely from operating activities to fund its operations.

 

In addition, PowerFleet Israel and Pointer are party to a Credit Agreement (the “Credit Agreement”) with Bank Hapoalim B.M. (“Hapoalim”), pursuant to which Hapoalim agreed to provide PowerFleet Israel with two senior secured term loan facilities in an aggregate principal amount of $30,000 (comprised of two facilities in the aggregate principal amount of $20,000 and $10,000) and a five-year revolving credit facility to Pointer in an aggregate principal amount of $10,000. The proceeds of the term loan facilities were used to finance a portion of the cash consideration payable in our acquisition of Pointer. The proceeds of the revolving credit facility may be used by Pointer for general corporate purposes. The Company has not borrowed under the revolving credit facility since its’ inception and does not have any borrowings as of June 30, 2021. See Note 11 for additional information.

 

The Company has on file a shelf registration statement on Form S-3 that was declared effective by the Securities and Exchange Commission (the “SEC”) on November 27, 2019. Pursuant to the shelf registration statement, the Company may offer to the public from time to time, in one or more offerings, up to $60,000 of our common stock, preferred stock, warrants, debt securities, and units, or any combination of the foregoing, at prices and on terms to be determined at the time of any such offering. The specific terms of any future offering will be determined at the time of the offering and described in a prospectus supplement that will be filed with the SEC in connection with such offering.

 

On May 14, 2020, the Company entered into an equity distribution agreement for an “at-the-market offering” program (the “ATM Offering”) with Canaccord Genuity LLC (“Canaccord”) as sales agent, pursuant to which we issued and sold an aggregate of 810 shares of common stock for approximately $4,200 in gross proceeds. The Company terminated the equity distribution agreement effective as of August 14, 2020.

 

On February 1, 2021, the Company closed an underwritten public offering (the “Underwritten Public Offering”) of 4,428 shares of common stock (which included the full exercise of the underwriters’ over allotment option) for gross proceeds of approximately $28,800, before deducting the underwriting discounts and commissions and other offering expenses. The offer and sale of common stock in the ATM Offering and the Underwritten Public Offering were made pursuant to the Company’s shelf registration statement.

 

Because of the recent outbreak of COVID-19, there is significant uncertainty surrounding the potential impact on our results of operations and cash flows. During 2020 we proactively took steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses and capital expenditures.

 

The Company believes that its available working capital, anticipated level of future revenues, expected cash flows from operations and available borrowings under its revolving credit facility with Hapoalim will provide sufficient funds to cover capital requirements through at least August 10, 2022.

 

NOTE 2 – USE OF ESTIMATES

 

The preparation of financial statements in conformity with U.S. GAAP 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. The Company continually evaluates estimates used in the preparation of the financial statements for reasonableness. The most significant estimates relate to measurements of fair value of assets acquired and liabilities assumed, realization of deferred tax assets, the impairment of tangible and intangible assets, the assessment of the Company’s incremental borrowing rate used to determine its right-of-use asset and lease liability, deferred revenue and stock-based compensation costs. Actual results could differ from those estimates.

 

As of June 30, 2021, the impact of the outbreak of COVID-19 continues to unfold. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.

 

NOTE 3 – CASH AND CASH EQUIVALENTS

 

The Company considers all highly liquid debt instruments with an original maturity of three months or less when purchased to be cash equivalents unless they are legally or contractually restricted. The Company’s cash and cash equivalent balances exceed Federal Deposit Insurance Corporation (FDIC) and other local jurisdictional limits. Restricted cash at December 31, 2020 and June 30, 2021 consists of cash held in escrow for purchases from a vendor.

 

9
 

 

NOTE 4 - REVENUE RECOGNITION

 

The Company and its subsidiaries generate revenue from sales of systems and products and from customer SaaS and hosting infrastructure fees. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes the Company collects concurrently with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The expected costs associated with the Company’s base warranties continue to be recognized as expense when the products are sold (see Note 12).

 

Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied. Product sales are recognized at a point in time when title transfers, when the products are shipped, or when control of the system is transferred to the customer, which usually is upon delivery of the system and when contractual performance obligations have been satisfied. For products which do not have stand-alone value to the customer separate from the SaaS services provided, the Company considers both hardware and SaaS services a bundled performance obligation. Under the applicable accounting guidance, all of the Company’s billings for equipment and the related cost for these systems are deferred, recorded, and classified as a current and long-term liability and a current and long-term asset, respectively. The deferred revenue and cost are recognized over the service contract life, ranging from one to five years, beginning at the time that a customer acknowledges acceptance of the equipment and service.

 

The Company recognizes revenue for remotely hosted SaaS agreements and post-contract maintenance and support agreements beyond our standard warranties over the life of the contract. Revenue is recognized ratably over the service periods and the cost of providing these services is expensed as incurred. Amounts invoiced to customers which are not recognized as revenue are classified as deferred revenue and classified as short-term or long-term based upon the terms of future services to be delivered. Deferred revenue also includes prepayment of extended maintenance, hosting and support contracts.

 

The Company earns other service revenues from installation services, training and technical support services which are short-term in nature and revenue for these services are recognized at the time of performance when the service is provided.

 

The Company recognizes revenue on non-recurring engineering services over time, on an input-cost method performance basis, as determined by the relationship of actual labor and material costs incurred to date compared to the estimated total project costs. Estimates of total project costs are reviewed and revised during the term of the project. Revisions to project costs estimates, where applicable, are recorded in the period in which the facts that give rise to such changes become known.

 

The Company also derives revenue from leasing arrangements. Such arrangements provide for monthly payments covering product or system sale, maintenance, support and interest. These arrangements meet the criteria to be accounted for as sales-type leases. Accordingly, an asset is established for the “sales-type lease receivable” at the present value of the expected lease payments and revenue is deferred and recognized over the service contract, as described above. Maintenance revenues and interest income are recognized monthly over the lease term.

 

The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on observable prices charged to customers or adjusted market assessment or using expected cost-plus margin when one is available. The adjusted market assessment price is determined based on overall pricing objectives taking into consideration market conditions and entity specific factors.

 

The Company recognizes an asset for the incremental costs of obtaining the contract arising from the sales commissions to employees because the Company expects to recover those costs through future fees from the customers. The Company amortizes the asset over one to five years because the asset relates to the services transferred to the customer during the contract term of one to five years.

 

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.

 

Deferred product costs consist of logistics visibility solutions equipment costs deferred in accordance with our revenue recognition policy. The Company evaluates the realizability of the carrying amount of the deferred contract costs. To the extent the carrying value of the deferred contract costs exceed the contract revenue, an impairment loss will be recognized.

 

The following table presents the Company’s revenues disaggregated by revenue source for the three- and six-months ended June 30, 2020 and 2021:

 

   Three Months Ended June 30   Six Months Ended June 30, 
   2020   2021   2020   2021 
                 
Products  $9,394   $15,466   $22,602   $26,886 
Services   16,371    18,082    33,962    35,653 
                     
   $25,765   $33,548   $56,564   $62,539 

 

10
 

 

The balances of contract assets, and contract liabilities from contracts with customers are as follows as of December 31, 2020 and June 30, 2021:

 

   December 31, 2020   June 30, 2021 
       (unaudited) 
         
Assets:          
Deferred contract costs  $2,157   $2,325 
Deferred costs  $5,361   $3,963 
           
Liabilities:          
Deferred revenue- services (1)  $6,578   $8,525 
Deferred revenue - products (1)   6,767    4,944 
           
    13,345    13,469 
Less: Deferred revenue and contract liabilities - current portion   (7,339)   (8,048)
           
Deferred revenue and contract liabilities - less current portion  $6,006   $5,421 

 

(1) The Company records deferred revenues when cash payments are received or due in advance of the Company’s performance. For the three- and six-month periods ended June 30, 2020 and 2021, the Company recognized revenue of $2,426 and $4,600, respectively, and $2,502 and $5,220, respectively that was included in the deferred revenue balance at the beginning of each reporting period. The Company expects to recognize as revenue these deferred revenue balances before the year 2026, when the services are performed and, therefore, satisfies its performance obligation to the customers.

 

NOTE 5 – PREPAID EXPENSES AND OTHER ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

   December 31, 2020   June 30, 2021 
       (Unaudited) 
Finance receivables, current  $692   $648 
Prepaid expenses   2,979    3,455 
Contract assets   767    901 
Other current assets   1,746    1,905 
           
 Prepaid expenses and other current assets  $6,184   $6,909 

 

NOTE 6 - INVENTORY

 

Inventory, which primarily consists of finished goods and components used in the Company’s products, is stated at the lower of cost or net realizable value using the “moving average” cost method or the first-in first-out (FIFO) method. Inventory is shown net of a valuation reserve of $515 at December 31, 2020, and $607 at June 30, 2021.

 

11
 

 

Inventories consist of the following:

 

   December 31, 2020   June 30, 2021 
       (Unaudited) 
Components  $7,697   $6,693 
Work in process   237    348 
Finished goods, net   4,939    6,431 
           
 Inventory, Net  $12,873   $13,472 

 

NOTE 7 - FIXED ASSETS

 

Fixed assets are stated at cost, less accumulated depreciation and amortization, and are summarized as follows:

 

   December 31, 2020   June 30, 2021 
       (Unaudited) 
Installed products  $4,174   $5,715 
Computer software   5,882    6,201 
Computer and electronic equipment   5,273    5,534 
Furniture and fixtures   1,828    1,877 
Leasehold improvements   1,353    1,362 
           
    18,510    20,689 
Accumulated depreciation and amortization   (9,706)   (11,823)
   $8,804   $8,866 

 

Depreciation and amortization expense of fixed assets for the three- and six-month periods ended June 30, 2020 was $651, and $1,386, respectively, and for the three- and six-month periods ended June 30, 2021 was $788 and $1,633, respectively. This includes amortization of costs associated with computer software for the three- and six-month periods ended June 30, 2020 of $130 and $261, respectively, and for the three- and six- month periods ended June 30, 2021 of $103 and $210, respectively.

 

12
 

 

NOTE 8 - INTANGIBLE ASSETS AND GOODWILL

 

The following table summarizes identifiable intangible assets of the Company as of December 31, 2020 and June 30, 2021:

 

June 30, 2021 (Unaudited) 

Useful Lives

(In Years)

   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
Amortized:                    
Customer relationships   9-12   $19,264   $(3,545)  $15,719 
Trademark and tradename   3-15    7,553    (1,693)   5,860 
Patents   7-11    2,117    (1,706)   411 
Technology   7    10,911    (4,441)   6,470 
Favorable contract interest   4    388    (380)   8 
Covenant not to compete   5    208    (163)   45 
         40,441    (11,928)   28,513 
                     
Unamortized:                    
Customer List        104    -    104 
Trademark and tradename        61    -    61 
                     
         165    -    165 
                     
Total       $40,606   $(11,928)  $28,678 

 

December 31, 2020 

Useful Lives

(In Years)

   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
Amortized:                    
Customer relationships   9-12   $19,264   $(2,732)  $16,532 
Trademark and tradename   3-15    7,553    (1,292)   6,261 
Patents   7-11    2,117    (1,661)   456 
Technology   7    10,911    (3,172)   7,739 
Favorable contract interest   4    388    (331)   57 
Covenant not to compete   5    208    (142)   66 
         40,441    (9,330)   31,111 
                     
Unamortized:                    
Customer List        104    -    104 
Trademark and tradename        61    -    61 
                     
         165    -    165 
                     
Total       $40,606   $(9,330)  $31,276 

 

13
 

 

At June 30, 2021, the weighted-average amortization period for the intangible assets was 9.2 years. At June 30, 2021, the weighted-average amortization periods for customer relationships, trademarks and trade names, patents, technology, favorable contract interests and covenant not to compete were 11.9, 9.6, 9.8, 4.3, 4.0 and 5.0 years, respectively.

 

Amortization expense for the three- and six-month periods ended June 30, 2020 was $1,333 and $2,665 respectively, and for the three- and six-month periods ended June 30, 2021 was $1,298 and $2,597, respectively. Estimated future amortization expense for each of the five succeeding fiscal years for these intangible assets is as follows:

 

Year ending December 31:     
2021 (remaining)  $2,557 
2022   5,080 
2023   5,035 
2024   2,622 
2025   2,495 
2026   2,413 
Thereafter   8,311 
 Finite-Lived Intangible Assets, Net, Total  $28,513 

 

There have been no changes in the carrying amount of goodwill from January 1, 2020 to June 30, 2021.

 

For the six-month period ended June 30, 2021, the Company did not identify any indicators of impairment.

 

14
 

 

NOTE 9 - STOCK-BASED COMPENSATION

 

Stock Option Plans

 

[A] Stock options:

 

The following table summarizes the activity relating to the Company’s stock options for the six-month period ended June 30, 2021:

 

   Options  

Weighted- Average

Exercise Price

   Weighted-Average Remaining Contractual Terms  Aggregate Intrinsic Value 
                
Outstanding at beginning of year   3,624   $5.85         
Granted   120    7.77         
Exercised   (141)   5.58         
Forfeited or expired   (62)   6.04         
                   
Outstanding at end of period   3,541   $5.92   7.8 years  $2,584 
                   
Exercisable at end of period   1,276   $5.66   6.4 years  $1,218 

 

The fair value of each option grant on the date of grant is estimated using the Black-Scholes option-pricing model reflecting the following weighted-average assumptions:

 

   June 30, 
   2020   2021 
         
Expected volatility   44.7%   50.2%
Expected life of options (in years)   6    7 
Risk free interest rate   1.17%   0.69%
Dividend yield   0%   0%
Weighted-average fair value of options granted during year  $2.58   $3.81 

 

Expected volatility is based on historical volatility of the Company’s common stock and the expected life of options is based on historical data with respect to employee exercise periods.

 

The Company recorded stock-based compensation expense of $411 and $843 for the three- and six-month periods ended June 30, 2020, respectively and $339 and $716, for the three- and six-month periods ended June 30, 2021, respectively, in connection with awards made under the stock option plans.

 

The fair value of options vested during the six-month periods ended June 30, 2020 and 2021 was $1,012 and $438, respectively. The total intrinsic value of options exercised during the six-month periods ended June 30, 2020 and 2021 was $225 and $465, respectively.

 

15
 

 

As of June 30, 2021, there was approximately $3,480 of unrecognized compensation cost related to non-vested options granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 3.84 years.

 

The Company estimates forfeitures at the time of valuation and reduces expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

 

[B] Restricted Stock Awards:

 

The Company grants restricted stock to employees, whereby the employees are contractually restricted from transferring the shares until they are vested. The stock is unvested at the time of grant and, upon vesting, there are no legal restrictions on the stock. The fair value of each share is based on the Company’s closing stock price on the date of the grant. A summary of all non-vested restricted stock for the six-month period ended June 30, 2021 is as follows: 

 

  

Number of

Non-Vested

Shares

  

Weighted-Average

Grant Date

Fair Value

 
         
Restricted stock, non-vested, beginning of year   806   $5.54 
Granted   416    7.67 
Vested   (129)   6.94 
Forfeited or expired   (23)   5.40 
           
Restricted stock, non-vested, end of period   1,070   $6.20 

 

The Company recorded stock-based compensation expense of $449 and $1,048, respectively, for the three- and six-month periods ended June 30, 2020, and $710 and $1,375, respectively, for the three- and six-month periods ended June 30, 2021, in connection with restricted stock grants. As of June 30, 2021, there was $4,275 of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted-average period of 2.8 years.

 

[C] Restricted Stock Units:

 

The Company also grants restricted stock units (RSUs) to employees. The following table summarizes the activity relating to the Company’s restricted stock units for the six-month period ended June 30, 2021: 

 

  

Number of

Restricted

Stock Units

  

Weighted-Average

Grant Date

Fair Value

 
         
Restricted stock units, non-vested, beginning of year   75   $5.60 
Granted   -    - 
Vested   (34)   5.60 
Forfeited   (4)   5.60 
           
 Restricted stock units, non-vested, end of period   37   $5.60 

 

The Company recorded stock-based compensation expense of $67 and $195, respectively, for the three- and six-month periods ended June 30, 2020, and $46 and $101, respectively, for the three- and six-month periods ended June 30, 2021, in connection with the RSUs. As of June30, 2021, there was $146 total unrecognized compensation cost related to non-vested RSUs. That cost is expected to be recognized over a weighted-average period of 0.8 years.

 

16
 

 

NOTE 10 - NET LOSS PER SHARE

 

Net loss per share for the three- and six-month periods ended June 30, 2020 and 2021 are as follows:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2020   2021   2020   2021 
Basic and diluted loss per share                    
Net loss attributable to common stockholders  $(3,766)  $(2,633)  $(8,315)  $(5,616)
                     
Weighted-average common share outstanding - basic and diluted   29,399    34,898    29,216    34,083 
                     
Net loss attributable to common stockholders - basic and diluted  $(0.13)  $(0.08)  $(0.28)  $(0.16)

 

 

Basic loss per share is calculated by dividing net loss attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution assuming common shares were issued upon the exercise of outstanding options and the proceeds thereof were used to purchase outstanding common shares. Dilutive potential common shares include outstanding stock options, warrants and restricted stock and performance share awards. We include participating securities (unvested share-based payment awards and equivalents that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of earnings per share pursuant to the two-class method. Our participating securities consist solely of preferred stock, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. For the six-month periods ended June 30, 2020 and June 30, 2021, the basic and diluted weighted-average shares outstanding are the same, since the effect from the potential exercise of outstanding stock options, conversion of preferred stock, and vesting of restricted stock and restricted stock units totaling 12,027 and 12,141, respectively, would have been anti-dilutive due to the loss.

 

NOTE 11 - SHORT-TERM BANK DEBT AND LONG-TERM DEBT

 

   December 31, 2020   June 30, 2021 
       (Unaudited) 
Short-term bank debt  $280   $391 
Short-term bank debt  $280   $391 
Current maturities of long-term debt  $5,299   $5,527 
Long term debt - less current maturities  $23,179   $20,015 

 

17
 

 

Short-term bank debt consists of bank revolving credit/overdraft accounts bearing interest at 12.7% and 16% per annum.

 

Long-term debt

 

In connection with the Transactions, PowerFleet Israel incurred $30,000 in term loan borrowings on the closing date of the Transactions (the “Closing Date”) under the Credit Agreement, pursuant to which Hapoalim agreed to provide PowerFleet Israel with two senior secured term loan facilities in an aggregate principal amount of $30,000 (comprised of two facilities in the aggregate principal amount of $20,000 and $10,000, respectively (the “Term A Facility” and “Term B Facility”, respectively, and collectively, the “Term Facilities”)) and a five-year revolving credit facility (the “Revolving Facility”) to Pointer in an aggregate principal amount of $10,000 (collectively, the “Credit Facilities”). On the first anniversary of the Closing Date, the Company was required to deposit in a separate restricted deposit account the Israeli shekel (“NIS”) equivalent of $3,000. As of June 30, 2021, no amounts were outstanding under the Revolving Facility.

 

The Credit Facilities will mature on the date that is five years from the Closing Date. The indicative interest rate provided for the Term Facilities in the Credit Agreement is approximately 4.73% for the Term A Facility and 5.89% for the Term B Facility. The interest rate for the Revolving Facility is, with respect to NIS-denominated loans, Hapoalim’s prime rate + 2.5%, and with respect to US dollar-denominated loans, LIBOR + 4.6%. In addition, the Company pays a 1% commitment fee on the unutilized and uncancelled availability under the Revolving Facility. The Credit Facilities are secured by the shares held by PowerFleet Israel in Pointer and by Pointer over all of its assets. The Credit Agreement includes customary representations, warranties, affirmative covenants, negative covenants (including the following financial covenants, tested quarterly: Pointer’s net debt to EBITDA; Pointer’s net debt to working capital; minimum equity of PowerFleet Israel; PowerFleet Israel equity to total assets; PowerFleet Israel net debt to EBITDA; and Pointer EBITDA to current payments and events of default. The Company is in compliance with the covenants as of June 30, 2021.

 

The Company has been in discussions with Hapoalim regarding an amendment to the Credit Agreement with respect to a reduction in the interest rates from approximately 4.73% for the Term A Facility and 5.89% for the Term B Facility to 3.65% for the Term A Facility and 4.5% for the Term B Facility as well as the elimination of the requirement to deposit in a separate restricted deposit account the Israeli shekel (“NIS”) equivalent of $3,000. Although subject to the execution of a definitive amendment to the Credit Agreement, the Company and Hapoalim have an agreement in principle with respect to these two provisions. In the interim, Hapoalim has agreed to not require the $3,000 escrow deposit and has agreed to reduce the interest rates to 3.65% for the Term A Facility and 4.5% for the Term B Facility effective November 2020.

 

In connection with the Credit Facilities, the Company incurred debt issuance costs of $742. For the three- and six-month periods ended June 30, 2021, amortization of the debt issuance costs was $72 and $155, respectively. The Company recorded charges of $383 and $743 for the three- and six-month periods ended June 30, 2020, respectively, and $276 and $553 for the three- and six-month periods ended June 30, 2021, respectively, to interest expense on its consolidated statements of operations related to interest expense and amortization of debt issuance costs associated with the Credit Facilities.

 

Scheduled maturities of the Term A Facility and the Term B Facility as of June 30, 2021 are as follows:

 

Year ending December 31:    
     
2022  $5,527 
2023   5,740 
2024   14,275 
 Long term debt   25,542 
Less: Current Portion   5,527 
Total  $20,015 

 

The Term B Facility is not subject to amortization over the life of the loan and instead the original principal amount is due in one installment on the fifth anniversary of the date of the consummation of the Transactions.

 

18
 

 

NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following:

 

   1   2 
   December 31, 2020   June 30, 2021 
       (Unaudited) 
Accounts payable  $9,877   $13,331 
Accrued warranty   705    880 
Accrued compensation   5,581    5,492 
Government authorities   3,047    3,035 
Other current liabilities   1,015    825 
           
 Accounts payable and accrued expenses  $20,225   $23,563 

 

The Company’s products are warranted against defects in materials and workmanship for a period of one to three years from the date of acceptance of the product by the customer. The customers may purchase an extended warranty providing coverage up to a maximum of 60 months. A provision for estimated future warranty costs is recorded for expected or historical warranty matters related to equipment shipped and is included in accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets as of December 31, 2020 and June 30, 2021.

 

The following table summarizes warranty activity for the six-month periods ended June 30, 2020 and 2021:

 

   Six Months Ended June 30, 
   2020   2021 
         
Accrued warranty reserve, beginning of year  $775   $807 
Accrual for product warranties issued   368    680 
Product replacements and other warranty expenditures   (355)   (220)
Expiration of warranties   (18)   (216)
           
Accrued warranty reserve, end of period (a)  $770   $1,051 

 

(a) Includes non-current accrued warranty included in other long-term liabilities at December 31, 2020 and June 30, 2021 of $102 and $171, respectively.

 

NOTE 13 - STOCKHOLDERS’ EQUITY

 

[A] Public Offering:

 

On February 1, 2021, the Company closed an underwritten public offering of 4,428 shares of common stock (which included the full exercise of the underwriters’ over-allotment option) for gross proceeds of approximately $28,800, before deducting the underwriting discounts and commissions and other offering expenses.

 

19
 

 

[B] Redeemable preferred stock

 

The Company is authorized to issue 150 shares of preferred stock, par value $0.01 per share of which 100 shares are designated Series A Preferred Convertible Stock (“Series A Preferred Stock”) and 50 shares are undesignated.

 

Series A Preferred Stock

 

In connection with the completion of the Transactions, on October 3, 2019, the Company issued 50 shares of Series A Preferred Stock to ABRY Senior Equity V, L.P., ABRY Senior Equity Co-Investment Fund V, L.P and ABRY Investment Partnership, L.P. (the “Investors”). For the six-month periods ended June 30, 2020 and June 30, 2021, the Company issued 1 and -0- additional shares of Series A Preferred Stock.

 

Liquidation

 

The Series A Preferred Stock has a liquidation preference equal to the greater of (i) the original issuance price of $1,000.00 per share, subject to certain adjustments (the “Series A Issue Price”), plus all accrued and unpaid dividends thereon (except in the case of a deemed liquidation event, then 150% of such amount) and (ii) the amount such holder would have received if the Series A Preferred Stock had converted into common stock immediately prior to such liquidation.

 

Dividends

 

Holders of Series A Preferred Stock are entitled to receive cumulative dividends at a minimum rate of 7.5% per annum (calculated on the basis of the Series A Issue Price), quarterly in arrears. The dividends are payable at the Company’s election, in kind, through the issuance of additional shares of Series A Preferred Stock, or in cash, provided no dividend payment failure has occurred and is continuing and that there has not previously occurred two or more dividend payment failures. Commencing on the 66-month anniversary of the date on which any shares of Series A Preferred Stock are first issued (the “Original Issuance Date”), and on each monthly anniversary thereafter, the dividend rate will increase by 100 basis points, until the dividend rate reaches 17.5% per annum, subject to the Company’s right to defer the increase for up to three consecutive months on terms set forth in the Company’s Amended and Restated Certificate of Incorporation (the “Charter”). During the six-month period ended June 30, 2021, the Company paid dividends in the amounts of $2,057 to the holders of the Series A Preferred Stock. As of June 30, 2021, dividends in arrears were $-0-.

 

Voting; Consent Rights

 

The holders of Series A Preferred Stock will be given notice by the Company of any meeting of stockholders or action to be taken by written consent in lieu of a meeting of stockholders as to which the holders of common stock are given notice at the same time as provided in, and in accordance with, the Company’s Amended and Restated Bylaws. Except as required by applicable law or as otherwise specifically set forth in the Charter, the holders of Series A Preferred Stock are not entitled to vote on any matter presented to the Company’s stockholders unless and until any holder of Series A Preferred Stock provides written notification to the Company that such holder is electing, on behalf of all holders of Series A Preferred Stock, to activate their voting rights and in doing so rendering the Series A Preferred Stock voting capital stock of the Company (such notice, a “Series A Voting Activation Notice”). From and after the delivery of a Series A Voting Activation Notice, all holders of the Series A Preferred Stock will be entitled to vote with the holders of common stock as a single class on an as-converted basis (provided, however, that any holder of Series A Preferred Stock shall not be entitled to cast votes for the number of shares of common stock issuable upon conversion of such shares of Series A Preferred Stock held by such holder that exceeds the quotient of (1) the aggregate Series A Issue Price for such shares of Series A Preferred Stock divided by (2) $5.57 (subject to adjustment for stock splits, stock dividends, combinations, reclassifications and similar events, as applicable)). So long as shares of Series A Preferred Stock are outstanding and convertible into shares of common stock that represent at least 10% of the voting power of the common stock, or the Investors or their affiliates continue to hold at least 33% of the aggregate amount of Series A Preferred Stock issued to the Investors on the Original Issuance Date, the consent of the holders of at least a majority of the outstanding shares of Series A Preferred Stock will be necessary for the Company to, among other things, (i) liquidate the Company or any operating subsidiary or effect any deemed liquidation event (as such term is defined in the Charter), except for a deemed liquidation event in which the holders of Series A Preferred Stock receive an amount in cash not less than the Redemption Price (as defined below), (ii) amend the Company’s organizational documents in a manner that adversely affects the Series A Preferred Stock, (iii) issue any securities that are senior to, or equal in priority with, the Series A Preferred Stock or issue additional shares of Series A Preferred Stock to any person other than the Investors or their affiliates, (iv) incur indebtedness above the agreed-upon threshold, (v) change the size of the Company’s board of directors to a number other than seven, or (vi) enter into certain affiliated arrangements or transactions.

 

20
 

 

Redemption

 

At any time, each holder of Series A Preferred Stock may elect to convert each share of such holder’s then-outstanding Series A Preferred Stock into the number of shares of the Company’s common stock equal to the quotient of (x) the Series A Issue Price, plus any accrued and unpaid dividends, divided by (y) the Series A Conversion Price in effect at the time of conversion. The Series A Conversion Price is initially equal to $7.319, subject to certain adjustments as set forth in the Charter.

 

At any time after the third anniversary of the Original Issuance Date, subject to certain conditions, the Company may redeem the Series A Preferred Stock for an amount per share, equal to the greater of (i) the product of (x) 1.5 multiplied by (y) the sum of the Series A Issue Price, plus all accrued and unpaid dividends and (ii) the product of (x) the number of shares of common stock issuable upon conversion of such Series A Preferred Stock multiplied by (y) the volume weighted average price of the common stock during the 30 consecutive trading day period ending on the trading date immediately prior to the date of such redemption notice or, if calculated in connection with a deemed liquidation event, the value ascribed to a share of common stock in such deemed liquidation event (the “Redemption Price”).

 

Further, at any time (i) after the 66-month anniversary of the Original Issuance Date, (ii) following delivery of a mandatory conversion notice by us, or (iii) upon a deemed liquidation event, subject to Delaware law governing distributions to stockholders, the holders of the Series A Preferred Stock may elect to require us to redeem all or any portion of the outstanding shares of Series A Preferred Stock for an amount per share equal to the Redemption Price.

 

On June 9, 2021, we entered into a preferred stock redemption right agreement (the “Redemption Right Agreement”) with the Investors, pursuant to which we have the right to redeem 10 shares of Series A Preferred Stock at a price of $1,450 per share plus all accrued and unpaid dividends, to be paid in cash. Our exercise of the redemption right under the Redemption Right Agreement is subject to, among other things, stockholder approval of an amendment to our Amended and Restated Certificate of Incorporation to modify certain terms of the Series A Preferred (the “Series A Preferred Amendment”), as described in detail in our definitive proxy statement on Schedule 14A filed with the SEC on June 11, 2021, and the decision of our board of directors to effect the Series A Preferred Amendment and the redemption. Our stockholders approved the Series A Preferred Amendment at our annual meeting of stockholders held on July 20, 2021. The closing of the redemption is also conditioned upon, among other things, our having sufficient “surplus” (as defined and calculated in the General Corporation Law of the State of Delaware) and funds lawfully available to pay the aggregate redemption price in cash and our, after giving effect to the redemption, having (i) net assets (as such term is defined and determined in accordance with Delaware law) greater than zero and greater than the amount which would be required as of the closing date of the redemption to pay the maximum amount which would be owed to stockholders with preferential rights in a liquidation of the Company and (ii) the requisite financial wherewithal to conduct our business, pay any and all liabilities as due and all then-incurred debts as they mature. The Redemption Right Agreement automatically terminates at 5:30 p.m. on October 1, 2021 if the redemption has not closed. As of August 9, 2021, we have not exercised our redemption right under Redemption Right Agreement.

 

NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Comprehensive income (loss) includes net loss and foreign currency translation gains and losses.

 

The accumulated balances for each classification of other comprehensive loss for the six-month period ended June 30, 2021 are as follows: 

 

   Foreign currency translation adjustment   Accumulated other comprehensive income 
         
Balance at January 1, 2021  $399   $399 
Net current period change   (331)   (331)
           
Balance at June 30, 2021  $68  $68

 

The accumulated balances for each classification of other comprehensive loss for the six-month period ended June 30, 2020 are as follows:

 

   Foreign currency translation adjustment   Accumulated other comprehensive income 
         
Balance at January 1, 2020  $265   $265 
Net current period change   (1,920)   (1,920)
           
Balance at June 30, 2020  $(1,655)  $(1,655)

 

The Company’s reporting currency is the U.S dollar (USD). For businesses where the majority of the revenues are generated in USD or linked to the USD and a substantial portion of the costs are incurred in USD, the Company’s management believes that the USD is the primary currency of the economic environment and thus their functional currency. Due to the fact that Argentina has been determined to be highly inflationary, the financial statements of our subsidiary in Argentina have been remeasured as if its functional currency was the USD. The Company also has foreign operations where the functional currency is the local currency. For these operations, assets and liabilities are translated using the end-of-period exchange rates and revenues, expenses and cash flows are translated using average rates of exchange for the period. Equity is translated at the rate of exchange at the date of the equity transaction. Translation adjustments are recognized in stockholders’ equity as a component of accumulated other comprehensive income (loss). Net translation losses from the translation of foreign currency financial statements of $(1,920) and $(331) at June 30, 2020 and 2021, respectively, are included in comprehensive loss in the Consolidated Statement of Changes in Stockholders’ Equity.

 

21
 

 

Foreign currency translation gains and losses related to operational expenses denominated in a currency other than the functional currency are included in determining net income or loss. Foreign currency translation (losses) gains for the three- and six-month periods ended June 30, 2020 of $112 and $(141), respectively, and for the three- and six-month periods ended June 30, 2021 of $56 and $206 respectively, are included in selling, general and administrative expenses in the Consolidated Statement of Operations. Foreign currency translation gains (losses) related to long-term debt of $(615) and $412, respectively, for the three- and six-month periods ended June 30, 2021 are included in interest expense in the Consolidated Statement of Operations.

 

NOTE 15 – SEGMENT INFORMATION

 

The Company operates in one reportable segment, wireless IoT asset management. The following table summarizes revenues by geographic region.

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2021   2020   2021 
                 
United States  $10,845   $13,622   $23,953   $25,210 
Israel   9,135    11,641    18,875    22,688 
Other   5,785    8,285    13,736    14,641 
                     
   $25,765   $33,548   $56,564   $62,539 

 

   December 31, 2020   June 30, 2021 
       (Unaudited) 
Long lived assets by geographic region:          
           
United States  $1,425   $1,252 
Israel   3,282    3,428 
Other   4,097    4,186 
           
   $8,804   $8,866 

 

NOTE 16 - INCOME TAXES

 

The Company records its interim tax provision based upon a projection of the Company’s annual effective tax rate (“AETR”). This AETR is applied to the year-to-date consolidated pre-tax income to determine the interim provision for income taxes before discrete items. The Company updates the AETR on a quarterly basis as the pre-tax income projections are revised and tax laws are enacted. The effective tax rate (“ETR”) each period is impacted by a number of factors, including the relative mix of domestic and foreign earnings and adjustments to recorded valuation allowances. The currently forecasted ETR may vary from the actual year-end due to the changes in these factors.

 

The Company’s global ETR for the six months ended June 30, 2020 and 2021 was (12)% and (20)%, respectively. For the six months ended June 30, 2020 and 2021 the effective tax rate differs from the statutory tax rates primarily due to the mix of domestic and foreign earnings amongst taxable jurisdictions and recorded valuation allowances to fully reserve against net operating loss carryforwards and other deferred tax assets in the United States and non-Israel foreign jurisdictions where realization of such tax attributes and deductible temporary differences remains uncertain at this time.

 

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law providing certain relief as a result of the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to the net operating loss carryback periods, alternative minimum tax credit refunds, modification to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not have a material impact on the Company’s consolidated financial statements.

 

On March 11, 2021, the President of the United States signed the American Rescue Plan Act (the “ARPA”) into law as a continuing response to the COVID-19 pandemic. The ARPA implemented new entity taxation provisions as well as extended unemployment benefits and related incentives to provide further economic relief to US businesses. The passage of the ARPA did not have a material impact to the Company nor its calculated AETR for the year.

 

22
 

 

NOTE 17 - LEASES

 

The Company has operating leases for office space and office equipment. The Company’s leases have remaining lease terms of one year to seven years, some of which include options to extend the lease term for up to five years.

 

The Company has lease arrangements which are classified as short-term in nature. These leases meet the criteria for operating lease classification. Lease costs associated with the short-term leases are included in selling, general and administrative expenses on the Company’s condensed consolidated statements of operations during the three- and six- months ended June 30, 2020 and 2021.

 

Components of lease expense are as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2021   2020   2021 
Short term lease cost:  $164   $177   $293   $355 

 

Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

 

   Six Months Ended June 30, 
   2020   2021 
Non-cash activity:          
Right-of-use assets obtained in exchange for lease obligations  $2,259   $1,111 

 

Weighted-average remaining lease term and discount rate for our operating leases are as follows:

 

   June 30, 2021 
     
Weighted-average remaining lease term (in years)   3.8 
Weighted-average discount rate   4.4%

 

Scheduled maturities of operating lease liabilities outstanding as of June 30, 2021 are as follows:

 

    1 
Year ending December 31:     
July - December 2021  $1,409 
2022   2,493 
2023   2,147 
2024   1,659 
2025   1,640 
Thereafter   1,518 
Total lease payments   10,866 
Less: Imputed interest   (1,260)
Present value of lease liabilities  $9,606 

 

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