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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: March 31, 2022

 

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

  (I.R.S. Employer
of 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 May 4, 2022, was 36,145,889.

 

 

 

 

 

 

INDEX

 

PowerFleet, Inc. and Subsidiaries

 

  Page
   
PART I - FINANCIAL INFORMATION 3
   
Item 1. Financial Statements 3
   
Condensed Consolidated Balance Sheets as of December 31, 2021 and March 31, 2022 (unaudited) 3
   
Condensed Consolidated Statements of Operations (unaudited) - for the three months ended March 31, 2021 and 2022 4
   
Condensed Consolidated Statements of Comprehensive Loss (unaudited) - for the three months ended March 31, 2021 and 2022 5
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) - for the periods January 1, 2021 through March 31, 2021 and January 1, 2022 through March 31, 2022 6
   
Condensed Consolidated Statements of Cash Flows (unaudited) - for the three months ended March 31, 2021 and 2022 7
   
Notes to Unaudited Condensed Consolidated Financial Statements 8
   
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 24
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
   
Item 4. Controls and Procedures 32
   
PART II - OTHER INFORMATION 33
   
Item 1. Legal Proceedings 33
   
Item 1A. Risk Factors 33
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
   
Item 6. Exhibits 34
   
Signatures 35
   
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, 2021*   March 31, 2022 
        (Unaudited) 
ASSETS          
Current assets:          
Cash and cash equivalents  $26,452   $20,559 
Restricted cash   308    308 
Accounts receivable, net of allowance for doubtful accounts of $3,176 and $3,468 in 2021 and 2022, respectively   32,094    31,861 
Inventory, net   18,243    20,313 
Deferred costs - current   1,762    1,416 
Prepaid expenses and other current assets   9,051    10,716 
Total current assets   87,910    85,173 
          
Deferred costs - less current portion   249    224 
Fixed assets, net   8,988    8,532 
Goodwill   83,487    83,487 
Intangible assets, net   26,122    24,848 
Right of use asset   9,787    9,597 
Severance payable fund   4,359    4,282 
Deferred tax asset   4,262    4,977 
Other assets   4,703    4,778 
Total assets  $229,867   $225,898 
           
LIABILITIES          
Current liabilities:          
Short-term bank debt and current maturities of long-term debt   6,114    6,006 
Accounts payable and accrued expenses   29,015    28,777 
Deferred revenue - current   6,519    7,168 
Lease liability - current   2,640    2,718 
Total current liabilities   44,288    44,669 
          
Long-term debt, less current maturities   18,110    16,258 
Deferred revenue - less current portion   4,428    4,466 
Lease liability - less current portion   7,368    7,128 
Accrued severance payable   4,887    4,857 
Deferred tax liability   5,220    5,305 
Other long-term liabilities   706    738 
          
Total liabilities   85,007    83,421 
Commitments and Contingencies (note 20)   -      
          
MEZZANINE EQUITY          
Convertible redeemable preferred stock: Series A – 100 shares authorized, $0.01 par value; 55 and 56 shares issued and outstanding at December 31, 2021 and March 31, 2022   52,663    53,859 
          
Preferred stock; authorized 50,000 shares, $0.01 par value;   -    - 
Common stock; authorized 75,000 shares, $0.01 par value; 37,263 and 37,570 shares issued at December 31, 2021 and March 31, 2022, respectively; shares outstanding, 35,882 and 36,146 at December 31, 2021 and March 31, 2022, respectively   373    376 
Additional paid-in capital   234,083    233,342 
Accumulated deficit   (134,437)   (137,366)
Accumulated other comprehensive gain (loss)   391    644 
Treasury stock; 1,381 and 1,424 common shares at cost at December 31, 2021
and March 31, 2022, respectively
   (8,299)   (8,480)
           
Total PowerFleet, Inc. stockholders’ equity   92,111    88,516 
Non-controlling interest   86    102 
Total equity   92,197    88,618 
Total liabilities and stockholders’ equity  $229,867   $225,898 

 

*Derived from audited balance sheet as of December 31, 2021.

 

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)

 

   2021   2022 
   Three Months Ended March 31, 
   2021   2022 
         
Revenues:          
Products  $11,420   $14,392 
Services   17,571    18,769 
Total revenues   28,991    33,161 
          
Cost of Revenues:          
Cost of products   8,152    11,978 
Cost of services   6,369    6,784 
Total cost of revenue   14,521    18,762 
          
Gross profit   14,470    14,399 
          
Operating expenses:          
Selling, general and administrative expenses   13,608    14,912 
Research and development expenses   2,745    3,229 
Total Operating expenses   16,353    18,141 
           
Income (loss) from operations   (1,883)   (3,742)
Interest income   12    13 
Interest expense   557    100 
Other (expense) income, net   -    (1)
          
Net loss before income taxes   (1,314)   (3,630)
           
Income tax benefit (expense)   (473)   703 
           
Net loss before non-controlling interest   (1,787)   (2,927)
Non-controlling interest   -    (1)
          
Net loss   (1,787)   (2,928)
Accretion of preferred stock   (168)   (168)
Preferred stock dividend   (1,028)   (1,028)
           
Net loss attributable to common stockholders  $(2,983)  $(4,124)
           
Net loss per share attributable to common stockholders - basic and diluted  $(0.09)  $(0.12)
           
Weighted average common shares outstanding - basic and diluted   33,259    35,332 

 

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)

 

   2021   2022 
   Three Months Ended 
   March 31, 
   2021   2022 
         
Net loss attributable to common stockholders  $(2,983)  $(4,124)
           
Foreign currency translation adjustment   (1,334)   253 
          
Total other comprehensive income (loss)   (1,334)   253 
           
Comprehensive loss  $(4,317)  $(3,871)

 

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)

 

                                 
`  Common Stock   Additional      Other             
   Number of Shares   Amount  

Paid-in

Capital

  

Accumulated

Deficit

   Comprehensive Income (Loss)   Treasury Stock   Non-controlling Interest   Stockholders’ Equity 
                                 
Balance at January 1, 2022       37,263   $373   $234,083   $(134,437)  $            391   $(8,299)  $                     86   $92,197 
Net loss attributable to common stockholders   -    -    (1,195)   (2,929)   -    -    -    (4,124)
Net loss attributable to non-controlling interest   -    -    -    -    -    -    1    1 
Foreign currency translation adjustment   -    -    -    -    253    -    15    268 
Issuance of restricted shares   398    4    (4)   -    -    -    -    - 
Forfeiture of restricted shares   (121)   (1)   1    -    -    -    -    - 
Vesting of restricted stock units   30    -    -    -    -    -    -    - 
Shares issued pursuant to exercise of stock options   -    -    -    -    -    -    -    - 
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (181)   -    (181)
Shares withheld pursuant to exercise of stock options   -    -    -    -    -    -    -    - 
Stock based compensation   -    -    457    -    -    -    -    457 
Common shares issued, net of issuance costs   -    -    -    -    -    -    -    - 
Balance at March 31, 2022   37,570   $376   $233,342   $(137,366)  $644   $(8,480)  $102   $88,618 

 

`  Common Stock   Additional       Other             
   Number of Shares   Amount  

Paid-in

Capital

  

Accumulated

Deficit

   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 

 

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)

 

   2021   2022 
   Three Months Ended March 31, 
   2021   2022 
         
Cash flows from operating activities          
Net loss  $(1,787)  $(2,928)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:          
Non-controlling interest   -    1 
Inventory reserve   74    53 
Stock based compensation expense   1,357    457 
Depreciation and amortization   2,144    2,089 
Right-of-use assets, non-cash lease expense   768    658 
Bad debt expense   268    252 
Deferred income taxes   473    (703)
Other non-cash items   88    556 
Changes in:          
Accounts receivable   (3,355)   (533)
Inventory   (829)   (1,929)
Prepaid expenses and other assets   214    (1,337)
Deferred costs   723    372 
Deferred revenue   1,230    689 
Accounts payable and accrued expenses   164    809 
Lease liabilities   (748)   (631)
           
Net cash (used in) provided by operating activities   784    (2,125)
           
Capital expenditures   (597)   (610)
           
Net cash (used in) provided by investing activities   (597)   (610)
           
Cash flows from financing activities:          
Net proceeds from stock offering   26,867    - 
Payment of preferred stock dividends   (1,028)   - 
Repayment of long-term debt   (1,315)   (1,497)
Short-term bank debt, net   91    - 
Proceeds from exercise of stock options, net   70    - 
Purchase of treasury stock upon vesting of restricted stock   (347)   (181)
           
Net cash (used in) provided by financing activities   24,338    (1,678)
           
Effect of foreign exchange rate changes on cash and cash equivalents   (1,701)   (1,480)
Net (decrease) increase in cash, cash equivalents and restricted cash   22,824    (5,893)
Cash, cash equivalents and restricted cash - beginning of period   18,435    26,760 
           
Cash, cash equivalents and restricted cash - end of period  $41,259   $20,867 
           
Reconciliation of cash, cash equivalents, and restricted cash, beginning of period          
Cash and cash equivalents   18,127    26,452 
Restricted cash   308    308 
Cash, cash equivalents, and restricted cash, beginning of period  $18,435   $26,760 
           
Reconciliation of cash, cash equivalents, and restricted cash, end of period          
Cash and cash equivalents   40,951    20,559 
Restricted cash   308    308 
Cash, cash equivalents, and restricted cash, end of period  $41,259   $20,867 
           
Supplemental disclosure of cash flow information:          
Cash paid for:          
Taxes   2    3 
Interest   384    326 
           
Noncash investing and financing activities:          
Value of shares withheld pursuant to exercise of stock options  $647   $- 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7

 

 

POWERFLEET, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2022

In thousands (except per share data)

 

NOTE 1 - DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION

 

Description of the Company

 

The Company is a global leader of Internet-of-Things (“IoT”) solutions providing valuable business intelligence for managing high-value enterprise assets that improve operational efficiencies.

 

I.D. Systems, Inc. (“I.D. Systems”) was incorporated in the State of Delaware in 1993. PowerFleet, Inc. was incorporated in the State of Delaware in February 2019 for the purpose of effectuating the transactions (the “Transactions”) pursuant to which the Company acquired Pointer Telocation Ltd. (“Pointer”) and commenced operations on October 3, 2019. Upon the closing of the Transactions, PowerFleet became the parent entity of I.D. Systems and Pointer.

 

Impact of COVID-19 and Supply Chain Disruptions

 

The ongoing COVID-19 pandemic, 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 of the pandemic on our business and financial results will depend largely on the future developments that cannot be accurately predicted at this time, including the duration of the spread of the outbreak and COVID-19 variants, the extent and effectiveness of containment actions and vaccination campaigns, 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.

 

In addition, the Company has experienced a significant impact to its supply chain given COVID-19 and the related global semiconductor chip shortage, including delays in supply chain deliveries, extended lead times and shortages of certain key components, some raw material cost increases and slowdowns at certain production facilities. As a result of these supply chain issues, the Company has had to increase its volume of inventory to ensure supply. During the three-month period ended March 31, 2022, the Company incurred supply chain constraint expenses which lowered its gross margins and decreased its profitability. The supply chain disruptions and the related global semiconductor chip shortage have delayed and may continue to delay the timing of some orders and expected deliveries of the Company’s products. If the impact of the supply chain disruptions are more severe than the Company expects, it could result in longer lead times, inventory supply challenges and further increased costs, all of which could result in the deterioration of the Company’s results, potentially for a longer period than currently anticipated.

 

As of the date of these unaudited consolidated financial statements, the full extent to which the COVID-19 pandemic and the related supply chain issues 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 March 31, 2022, the consolidated results of its operations for the three-month periods ended March 31, 2021 and 2022, the consolidated change in stockholders’ equity for the three-month periods ended March 31, 2021 and 2022, and the consolidated cash flows for the three-month periods ended March 31, 2021 and 2022. The results of operations for the three-month period ended March 31, 2022 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, 2021 included in the Company’s Annual Report on Form 10-K for the year then ended.

 

8

 

 

Liquidity

 

As of March 31, 2022, the Company had cash (including restricted cash) and cash equivalents of $20,867 and working capital of $40,504. 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, the Company’s subsidiaries, PowerFleet Israel Ltd. (“PowerFleet Israel”) and Pointer, are party to a Credit Agreement (the “Credit Agreement”) with Bank Hapoalim B.M. (“Hapoalim”), pursuant to which Hapoalim provided 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 the Company’s 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 under the revolving credit facility as of March 31, 2022. 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 its 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 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 Underwritten Public Offering were made pursuant to the Company’s shelf registration statement.

 

Because of the COVID-19 pandemic, there is significant uncertainty surrounding the potential impact on our results of operations and cash flows. During 2021 and 2022, 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 May 10, 2023.

 

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 realization of deferred tax assets, the impairment of intangible assets, and stock-based compensation costs. Actual results could differ from those estimates.

 

As of March 31, 2022, the impact 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, 2021 and March 31, 2022 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 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. 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.

 

The following table presents the Company’s revenues disaggregated by revenue source for the three-months ended March 31, 2021 and 2022:

 

   2021   2022 
   Three Months Ended March 31, 
   2021   2022 
         
Products  $11,420   $14,392 
Services   17,571    18,769 
           
Total revenue  $28,991   $33,161 

 

10

 

 

The balances of contract assets, and contract liabilities from contracts with customers are as follows as of December 31, 2021 and March 31, 2022:

 

   December 31, 2021   March 31, 2022 
         (unaudited) 
Assets:          
Deferred contract costs  $3,045   $

3,042

 
Deferred costs  $2,011   $1,640 
           
Liabilities:          
Deferred revenue- services (1)  $8,401   $

9,576

 
Deferred revenue - products (1)   

2,546

    

2,058

 
           
Deferred revenue   10,947    11,634 
Less: Deferred revenue and contract liabilities - current portion   (6,519)   (7,168)
           
Deferred revenue and contract liabilities - less current portion  $4,428   $4,466 

 

(1) The Company records deferred revenues when cash payments are received or due in advance of the Company’s performance. For the three-month periods ended March 31, 2021 and 2022, the Company recognized revenue of $2,718 and $2,208, 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 2027, 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, 2021   March 31, 2022 
         (Unaudited) 
Finance receivables, current  $786   $833 
Prepaid expenses   4,580    5,771 
Contract assets   1,124    1,136 
Other current assets   2,561    2,976 
           
Prepaid expenses and other current assets  $9,051   $10,716 

 

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 $260 at December 31, 2021, and $301 at March 31, 2022.

 

11

 

 

Inventories consist of the following:

 

   December 31, 2021   March 31, 2022 
         (Unaudited) 
Components  $11,137   $11,731 
Work in process   699    269 
Finished goods, net   6,407    8,313 
           
Inventory, net  $18,243   $20,313 

 

NOTE 7 - FIXED ASSETS

 

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

 

   December 31, 2021   March 31, 2022 
         (Unaudited) 
Installed products  $6,190   $7,373 
Computer software   6,732    6,288 
Computer and electronic equipment   5,688    5,999 
Furniture and fixtures   2,246    2,340 
Leasehold improvements   1,445    1,479 
           
Property, plant and equipment, gross   22,301    23,479 
Accumulated depreciation and amortization   (13,313)   

(14,947

)
Property, plant and equipment, net  $8,988   $8,532 

 

Depreciation and amortization expense of fixed assets for the three-month periods ended March 31, 2021 and March 31, 2022 was $845, and $814, respectively. This includes amortization of costs associated with computer software for the three-month periods ended March 31, 2021 and March 31, 2022 of $107 and $109, respectively.

 

12

 

 

NOTE 8 - INTANGIBLE ASSETS AND GOODWILL

 

The following table summarizes identifiable intangible assets of the Company as of December 31, 2021 and March 31, 2022:

 

March 31, 2022 (Unaudited) 

Useful Lives

(In Years)

  Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
Amortized:                  
Customer relationships  9-12  $19,264   $(4,763)  $14,501 
Trademark and tradename  3-15    7,553    (2,296)   5,257 
Patents  7-11    628    (284)   344 
Technology  7   10,911    (6,344)   4,567 
Favorable contract interest  4   388    (388)   - 
Covenant not to compete  5   208    (194)   14 
       38,952    (14,269)   24,683 
                   
Unamortized:                  
Customer List      104    -    104 
Trademark and tradename      61    -    61 
                   
       165    -    165 
                   
Total     $39,117   $(14,269)  $24,848 

 

December 31, 2021  Useful Lives
(In Years)
  Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
Amortized:                  
Customer relationships  9-12  $19,264   $(4,356)  $14,908 
Trademark and tradename  3-15   7,553    (2,096)   5,457 
Patents  7-11   628    (262)   366 
Technology  7   10,911    (5,709)   5,202 
Favorable contract interest  4   388    (388)   - 
Covenant not to compete  5   208    (184)   24 
       38,952    (12,995)   25,957 
                   
Unamortized:                  
Customer List      104    -    104 
Trademark and tradename      61    -    61 
                   
       165    -    165 
                   
Total     $39,117   $(12,995)  $26,122 

  

At March 31, 2022, the weighted-average amortization period for the intangible assets was 9.1 years. At March 31, 2022, 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, 7.0, 4.3, 0.0 and 5.0 years, respectively.

 

Amortization expense for the three-month periods ended March 31, 2021 and March 31, 2022 was $1,299 and $1,274, respectively. Estimated future amortization expense for each of the five succeeding fiscal years for these intangible assets is as follows:

 

Year ending December 31:    
2022 (remaining)  $3,805 
2023   5,035 
2024   2,622 
2025   2,495 
2026   2,413 
2027   2,233 
Thereafter   6,080 
Finite-Lived intangible assets  $24,683 

 

There have been no changes in the carrying amount of goodwill from January 1, 2021 to March 31, 2022.

 

For the three-month period ended March 31, 2022, the Company did not identify any indicators of impairment.

 

13

 

 

NOTE 9 - STOCK-BASED COMPENSATION

 

Stock Option Plans

 

The Company granted options to purchase 5,065,000 shares of the Company’s common stock to certain executives. The options have an exercise price that range from $2.85 to $21.00. The options will vest and become exercisable if the volume weighted average price of the Company’s common stock during a consecutive 60-day trading period (the “60 Day VWAP”) ranges between $10.50 and $21.00. The Company valued the market-based performance stock option awards using a Monte Carlo simulation model using a daily price forecast over ten years until expiration utilizing Geometric Brownian Motion that considers a variety of factors including, but not limited to, the Company’s common stock price, risk-free rate (1.8%), and expected stock price volatility (53.9%) over the expected life of awards (10 years). The weighted average fair value of options granted during the period was $1.27.

 

[A] Stock options:

 

The following table summarizes the activity relating to the Company’s market based stock options that were granted to certain executives for the three-month period ended March 31, 2022:

 

   Options   Weighted- Average Exercise Price   Weighted-Average Remaining Contractual Terms  Aggregate Intrinsic Value 
                
Outstanding at beginning of year   -   $-         
Granted   5,065    14.14         
Exercised   -    -         
Forfeited or expired   -    -         
                   
Outstanding at end of period   5,065   $14.14   9.8 years   $453 
                   
Exercisable at end of period   -   $-   -  $- 

 

The following table summarizes the activity relating to the Company’s stock options, excluding the market based stock options that were granted to certain executives, for the three-month period ended March 31, 2022:

 

   Options   Weighted- Average Exercise Price   Weighted-Average Remaining Contractual Terms  Aggregate Intrinsic Value 
                
Outstanding at beginning of year   3,470   $5.91         
Granted   895    4.08         
Exercised   -    -         
Forfeited or expired   (949)   6.14         
                   
Outstanding at end of period   3,416   $5.92   6.9 years  $192 
                   
Exercisable at end of period   1,640   $5.72   4.7 years  $20 

 

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:

 

   2021   2022 
   March 31, 
   2021   2022 
         
Expected volatility   50.2%   49.4%
Expected life of options (in years)   7    7 
Risk free interest rate   0.69%   1.73%
Dividend yield   0%   0%
Weighted-average fair value of options granted during year  $3.81   $2.04 

 

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 $377 and $34 for the three-month periods ended March 31, 2021 and March 31, 2022, respectively, in connection with awards made under the stock option plans.

 

The fair value of options vested during the three-month periods ended March 31, 2021 and 2022 was $408 and $235, respectively. The total intrinsic value of options exercised during the three-month periods ended March 31, 2021 and 2022 was $451 and $-0-, respectively.

 

14

 

 

As of March 31, 2022, there was approximately $6,300 of unrecognized compensation cost related to non-vested options granted under the Company’s stock option plans for the performance stock options that were granted to certain executives. That cost is expected to be recognized over a weighted-average period of 9.81 years.

 

As of March 31, 2022, there was approximately $2,982 of unrecognized compensation cost related to non-vested options granted under the Company’s stock option plans that exclude the performance stock options. That cost is expected to be recognized over a weighted average period of 3.30 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 three-month period ended March 31, 2022 is as follows:

 

   Number of Non-Vested Shares   Weighted-Average Grant Date Fair Value 
         
Restricted stock, non-vested, beginning of year   629   $7.06 
Granted   398    3.99 
Vested   (145)   7.39 
Forfeited   (120)   7.12 
           
Restricted stock, non-vested, end of period   762   $5.38 

 

The Company recorded stock-based compensation expense of $665 and $388, respectively, for the three-month periods ended March 31, 2021 and 2022, in connection with restricted stock grants. As of March 31, 2022, there was $3,330 of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted-average period of 2.97 years.

 

[C] Restricted Stock Units:

 

The Company also has granted restricted stock units (RSUs) to employees. The following table summarizes the activity relating to the Company’s restricted stock units for the three-month period ended March 31, 2022:

 

   Number of Restricted Stock Units   Weighted-Average Grant Date Fair Value 
         
Restricted stock units, non-vested, beginning of year   36   $5.60 
Granted   -    - 
Vested   (31)   5.60 
Forfeited   -    - 
           
Restricted stock units, non-vested, end of period   5   $5.60 

 

The Company recorded stock-based compensation expense of $55 and $35, respectively, for the three-month periods ended March 31, 2021 and 2022, in connection with the RSUs. As of March 31, 2022, there was $17 total unrecognized compensation cost related to non-vested RSUs. That cost is expected to be recognized over a weighted-average period of 0.6 years.

 

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NOTE 10 - NET LOSS PER SHARE

 

Net loss per share for the three-month periods ended March 31, 2021 and 2022 are as follows:

 

   2021   2022 
   Three Months Ended 
   March 31, 
   2021   2022 
Basic and diluted loss per share          
Net loss attributable to common stockholders  $(2,983)  $(4,124)
           
Weighted-average common share outstanding - basic and diluted   33,259    35,332 
           
Net loss attributable to common stockholders - basic and diluted  $(0.09)  $(0.12)

 

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 three-month periods ended March 31, 2021 and 2022, 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 12,243 and 16,882, respectively, would have been anti-dilutive due to the loss.

 

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

 

   December 31, 2021   March 31, 2022 
         (Unaudited) 
Current maturities of long-term debt  $6,114   $6,006 
Long term debt - less current maturities  $18,110   $16,258 

 

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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”). As of March 31, 2022, 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 original Credit Agreement was 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 agreed to pay 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 original 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.

 

On August 23, 2021, PowerFleet Israel and Pointer (the “Borrowers”) entered into an amendment (the “Amendment”), effective as of August 1, 2021, to the Credit Agreement with Hapoalim. The Amendment memorializes the agreements between the Borrowers and Hapoalim regarding a reduction in the interest rates of the two Term Facilities. Pursuant to the Amendment, commencing as of November 12, 2020, the interest rate with respect to the Term A Facility was reduced to a fixed rate of 3.65% per annum and the interest rate with respect to the Term B Facility was reduced to a fixed rate of 4.5% per annum. The Amendment also provides, among other things, for (i) a reduction in the credit allocation fee on undrawn and uncancelled amounts of the Revolving Facility from 1% to 0.5% per annum, (ii) removal of the requirement that PowerFleet Israel maintain $3,000 on deposit in a separate reserve fund, and (iii) modifications to certain of the affirmative and negative covenants, including a financial covenant regarding the ratio of the Borrowers’ debt levels to Pointer’s EBITDA. The Company is in compliance with the covenants as of March 31, 2022.

 

In connection with the Credit Facilities, the Company incurred debt issuance costs of $742. For the three-month periods ended March 31, 2021 and 2022, amortization of the debt issuance costs was $83 and $64, respectively. The Company recorded charges of $277 and $236 for the three-month periods ended March 31, 2021 and 2022, 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 long-term debt as of March 31, 2022 are as follows:

 

Year ending December 31:    
April - December 2022  $4,532 
2023  5,092 
2024   12,640 
Long term debt   22,264 
Less: Current Portion   6,006 
Total  $16,258 

 

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.

 

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NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following:

 

   December 31, 2021  

March 31, 2022

 
         (Unaudited) 
Accounts payable  $17,748   $17,852 
Accrued warranty   1,146    1,317 
Accrued compensation   6,644    6,293 
Government authorities   2,080    2,511 
Other current liabilities   1,397    804 
           
Accounts payable and accrued expenses  $29,015   $28,777 

 

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, 2021 and March 31, 2022.

 

The following table summarizes warranty activity for the three-month periods ended March 31, 2021 and 2022:

 

   2021   2022 
   Three Months Ended March 31, 
   2021   2022 
         
Accrued warranty reserve, beginning of year  $807   $1,333 
Accrual for product warranties issued   396    342 
Product replacements and other warranty expenditures   (127)   (167)
Expiration of warranties   (75)   (5)
           
Accrued warranty reserve, end of period (a)  $1,001   $1,503 

 

(a) Includes non-current accrued warranty included in other long-term liabilities at December 31, 2021 and March 31, 2022 of $187 and $186, 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.

 

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[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 Convertible Preferred 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 three-month periods ended March 31, 2021 and March 31, 2022, the Company issued -0- and 1 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 three-month period ended March 31, 2022, the Company paid dividends in the amounts of 1 share to the holders of the Series A Preferred Stock. As of March 31, 2022, 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.

 

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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.

 

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 three-month period ended March 31, 2022 are as follows:

 

   Foreign currency translation adjustment   Accumulated other comprehensive income/(loss) 
         
Balance at January 1, 2022  $391   $391 
Net current period change   253    253 
          
Balance at March 31, 2022  $644   $644 

 

The accumulated balances for each classification of other comprehensive loss for the three-month period ended March 31, 2021 are as follows:

 

   Foreign currency translation adjustment   Accumulated other comprehensive income/(loss) 
         
Balance at January 1, 2021  $399   $399 
Net current period change   (1,334)   (1,334)
          
Balance at March 31, 2021  $(935)  $(935)

 

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 gains/(losses) from the translation of foreign currency financial statements of $1,334 and $(253) at March 31, 2021 and 2022, respectively, are included in comprehensive loss in the Consolidated Statement of Changes in Stockholders’ Equity.

 

20

 

 

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-month periods ended March 31, 2021 and 2022 of $150 and $(203), 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 $1,027 and $544, respectively, for the three-month periods ended March 31, 2021 and 2022 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.

 

   2021   2022 
   Three Months Ended March 31, 
   2021   2022 
         
United States  $11,588   $13,058 
Israel   11,047    12,180 
Other   6,356    7,923 
           
Total revenues  $28,991   $33,161 

 

   December 31, 2021   March 31, 2022 
         (Unaudited) 
Long lived assets by geographic region:          
           
United States  $1,123   $959 
Israel   3,675    3,289 
Other   4,190    4,284 
           
Long lived assets  $8,988   $8,532 

 

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.

 

   2021   2022 
   Three Months Ended March 31, 
   2021   2022 
         
Domestic pre-tax book income/(loss)  $(2,722)  $(2,919)
Foreign pre-tax book income/(loss)   1,408    (711)
Total income before income (loss) taxes   (1,314)   (3,630)
Income tax benefit (expense)   (473)   703 
Total income (loss) after taxes  $(1,787)  $(2,927)
           
Effective tax rate   (36.0%)   19.4%

 

For the three-month periods ended March 31, 2021 and 2022, the effective tax rate differed from the statutory tax rates primarily due to the mix of domestic and foreign earnings amongst taxable jurisdictions, recorded valuation allowances to fully reserve against deferred tax assets in non-Israel jurisdictions and certain discrete items.

 

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.

 

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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-months ended March 31, 2021 and 2022.

 

Components of lease expense are as follows:

 

  

Three Months Ended

March 31,

 
   2021   2022  
Short term lease cost:  $178   $131  

 

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

 

   2021   2022 
  

Three Months Ended

March 31,

 
   2021   2022 
Non-cash activity:          
Right-of-use assets obtained in exchange for lease obligations  $1,053   $537 

 

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

 

   March 31, 2022 
     
Weighted-average remaining lease term (in years)   3.5 
Weighted-average discount rate   4.5%

 

Scheduled maturities of operating lease liabilities outstanding as of March 31, 2022 are as follows:

 

Year ending December 31:    
April - December 2022  $2,398 
2023   2,729 
2024   1,973 
2025   1,795 
2026   828 
Thereafter   1,180 
Total lease payments   10,903 
Less: Imputed interest   (1,057)
Present value of lease liabilities  $9,846 

 

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NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s cash and cash equivalents are carried at fair value. The carrying value of financing receivables approximates fair value due to the interest rate implicit in the instruments approximating current market rates. The carrying value of accounts receivables, accounts payable and accrued liabilities and short term bank debt approximates their fair values due to the short period to maturity of these instruments. The fair value of the Company’s long term debt is based on observable relevant market information and future cash flows discounted at current rates, which are Level 2 measurements.

 

   March 31, 2022 
   Carrying Amount   Fair Value 
Long term debt  $22,264   $22,264 

 

NOTE 19 - CONCENTRATION OF CUSTOMERS

 

For the three-month periods ended March 31, 2021 and 2022, there were no customers who generated revenues greater than 10% of the Company’s consolidated total revenues or generated greater than 10% of the Company’s consolidated accounts receivable.

 

NOTE 20 - COMMITMENTS AND CONTINGENCIES

 

Except for normal operating leases, the Company is not currently subject to any material commitments.

 

From time to time, the Company is involved in various litigation matters involving claims incidental to its business and acquisitions, including employment matters, acquisition related claims, patent infringement and contractual matters, among other issues. While the outcome of any such litigation matters cannot be predicted with certainty, management currently believes that the outcome of these proceedings, including the matters described below, either individually or in the aggregate, will not have a material adverse effect on its business, results of operations or financial condition. The Company records reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable.

 

In August 2014, Pointer do Brasil Comercial Ltda. (“Pointer Brazil”) received a notification of lack of payment of VAT tax (Brazilian ICMS tax) in the amount of $224, plus $1,133 of interest and penalty, totaling $1,357 as of March 31, 2022. The Company is vigorously defending this tax assessment before the administrative court in Brazil, but in light of the administrative and judicial processes in Brazil, it could take up to 14 years before the dispute is finally resolved. In case the administrative court rules against the Company, the Company could claim before the judicial court, an appellate court in Brazil, a substantial reduction of interest charged, potentially reducing the Company’s total exposure. The Company’s legal counsel is of the opinion that the chance of loss is not probable and for this reason the Company has not made any provision.

 

In July 2015, Pointer Brazil received a tax deficiency notice alleging that the services provided by Pointer Brazil should be classified as “telecommunication services” and therefore Pointer Brazil should be subject to the state value-added tax. The aggregate amount claimed to be owed under the notice was approximately $12,392 as of March 31, 2022. On August 14, 2018, the lower chamber of the State Tax Administrative Court in São Paulo rendered a decision that was favorable to Pointer Brazil in relation to the ICMS demands, but adverse in regards to the clerical obligation of keeping in good order a set of ICMS books and related tax receipts. The remaining claim after this administrative decision is $189. The state has the opportunity to appeal to the higher chamber of the State Tax Administrative Court. The Company’s legal counsel is of the opinion that the chance of loss is not probable and that no material costs will arise in respect to these claims. For this reason, the Company has not made any provision.

 

NOTE 21 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments,” which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment is intended to address the issue that the previous “incurred loss” methodology was restrictive for an entity’s ability to record credit losses based on not yet meeting the “probable” threshold. The new language will require these assets to be valued at amortized cost presented at the net amount expected to be collected with a valuation provision. This updated standard is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the consolidated financial condition and results of operations of PowerFleet, Inc. and its subsidiaries (“PowerFleet”, “we”, “our” or “us”) should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1 of this report. In the following discussions, most percentages and dollar amounts have been rounded to aid presentation, and, accordingly, all amounts are approximations.

 

Cautionary Note Regarding Forward-Looking Statements

 

This report contains “forward-looking statements” (within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which may include information concerning the Company’s beliefs, plans, objectives, goals, expectations, strategies, anticipations, assumptions, estimates, intentions, future events, future revenues or performance, capital expenditures and other information that is not historical information. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may be beyond the Company’s control, and which may cause the Company’s actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. When used in this report, the words “seek,” “estimate,” “expect,” “anticipate,” “project,” “plan,” “contemplate,” “plan,” “continue,” “intend,” “believe” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon the Company’s current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and beliefs, but there can be no assurance that the Company will realize its expectations or that its beliefs will prove to be correct.

 

There are a number of risks and uncertainties that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause the Company’s actual results to differ materially from those expressed as forward-looking statements herein include, but are not limited, to: future economic and business conditions; the ability to recognize the anticipated benefit of the acquisition of Pointer Telocation Ltd. (“Pointer”); the loss of any of the Company’s key customers or reduction in the purchase of the Company’s products by any such customers; the failure of the markets for the Company’s products to continue to develop; the possibility that the Company may not be able to integrate successfully the business, operations and employees of I.D. Systems, Inc. (“I.D. Systems”) and Pointer; the Company’s inability to adequately protect its intellectual property; the Company’s inability to manage growth; the effects of competition from a wide variety of local, regional, national and other providers of wireless solutions; changes in laws and regulations or changes in generally accepted accounting policies, rules and practices; changes in technology or products, which may be more difficult or costly, or less effective, than anticipated; the effects of outbreaks of pandemics or contagious diseases, including the length and severity of the recent global outbreak of the novel coronavirus, COVID-19, and its impact on the Company’s business; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “SEC”), including the Company’s annual report on Form 10-K for the year ended December 31, 2021 and this quarterly report on Form 10-Q for the three months ended March 31, 2022.

 

There may be other factors of which the Company is currently unaware or which it currently deems immaterial that may cause its actual results to differ materially from the forward-looking statements. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf apply only as of the date they are made and are expressly qualified in their entirety by the cautionary statements included in this report. Except as may be required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances occurring after the date they were made or to reflect the occurrence of unanticipated events, or otherwise.

 

The Company makes available through its Internet website, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports and other filings made by the Company with the SEC, as soon as practicable after the Company electronically files such reports and filings with the SEC. The Company’s website address is www.powerfleet.com. The information contained in the Company’s website is not incorporated by reference into this report.

 

Overview

 

PowerFleet, Inc. (together with its subsidiaries, “PowerFleet,” the “Company,” “we,” “our” or “us”) is a global leader of Internet-of-Things (“IoT”) solutions providing valuable business intelligence for managing high-value enterprise assets that improve operational efficiencies.

 

We are headquartered in Woodcliff Lake, New Jersey, with offices located around the globe.

 

Our patented technologies address the needs of organizations to monitor and analyze their assets to improve safety, increase efficiency and productivity, reduce costs, and improve profitability. Our offerings are sold under the global brands PowerFleet, Pointer and Cellocator.

 

We have an established history of IoT device development and innovation creating devices that can withstand harsh and rugged environments. With 54 patents and patent applications and 25 years’ experience, we believe we are well positioned to evolve our offerings for even greater value to customers through our cloud-based applications for unified operations.

 

We deliver advanced data solutions that connect mobile assets to increase visibility, operational efficiency and profitability. Across our spectrum of vertical markets, we differentiate ourselves by developing mobility platforms that collect data from unique sensors. Further, because we are original equipment manufacturer (“OEM”) agnostic, we help organizations view and manage their mixed assets homogeneously. All of our solutions are paired with software as a service (“SaaS”) and analytics platforms to provide an even deeper level of insights and understanding of how assets are utilized and how drivers and operators operate those assets. These insights include a full set of Key Performance Indicators (“KPI’s”) to drive operational and strategic decisions. Our customers typically get a return on their investment in less than 12 months from deployment.

 

Our enterprise software applications have machine learning capabilities and are built to integrate with our customers’ management systems to provide a single, integrated view of asset and operator activity across multiple locations while providing real-time enterprise-wide benchmarks and peer-industry comparisons. We look for analytics, as well as the data contained therein, to differentiate us from our competitors, adding significant value to customers’ business operations, and helping to contribute to their bottom line. Our solutions also feature open application programming interfaces (“API’s”) for additional integrations and development to boost other enterprise management systems and third-party applications.

 

We market and sell our connected IoT data solutions to a wide range of customers in the commercial and government sectors. Our customers operate in diverse markets, such as manufacturing, automotive manufacturing, wholesale and retail, food and grocery distribution, pharmaceutical and medical distribution, construction, mining, utilities, aerospace, vehicle rental, as well as logistics, shipping, transportation, and field services. Traditionally, these businesses have relied on manual, often paper-based, processes or on-premise legacy software to operate their high-value assets, manage workforce resources, and distributed sites; and face environmental, safety, and other regulatory requirements. In today’s landscape, it is crucial for these businesses to invest in solutions that enable easy analysis and sharing of real-time information.

  

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Our Solutions

 

We provide critical actionable information that powers unified operations throughout organizations. We are solving the challenge of inefficient data collection, real-time visibility, and analysis that leads to transformative business operations. Our SaaS cloud-based applications take data from our IoT devices and ecosystem of third-party and partner applications to present actionable information for customers to increase efficiencies, improve safety and security, and increase their profitability in easy-to-understand reports, dashboards, and real-time alerts.

 

Key Applications of our IoT Solutions:

 

The Company provides real-time intelligence for organizations with high-value assets allowing them to make informed decisions and ultimately improve their operations, safety, and bottom line. Our applications enable organizations to capture IoT data from various types of assets with devices and sensors creating a holistic view for analysis and action.

 

The core applications our IoT solutions address include:

 

End-to-end Visibility: Organizations with expensive assets such as vehicles, machinery, or equipment need to keep track of where the assets are located, monitor for misuse, and understand how and when assets are being used. By having complete visibility of their assets, customers can improve security, utilization and customer service. In addition, our visibility solutions help with personnel workflows and resource management, freight visibility through load status, equipment availability status, dwell and idle time, geofencing, two-way temperature control and management, multizone temperature monitoring, arrival and departure times, and supply chain allocation.

 

Regulatory Compliance: Businesses must comply with government regulations and provide proof of compliance, which is commonly an onerous process to enforce and maintain. Our solutions provide critical data points and reports to help customers stay within compliance, avoid fines for non-compliance, and automate the reporting process. We deliver real-time position reports, hours-of-service, temperature monitoring and control, electronic safety checklists, workflow management, controlling vehicle access to only authorized operators, inspection reports, and history logs of use.

 

Improve Safety: Our applications are designed to provide asset and operator management, monitoring, and visibility for safer environments. Our solutions allow our customers to monitor their fleet of vehicles on various parameters, including but not limited to, vehicle location, speed, engine fault codes, driver behavior, eco-driving, and ancillary sensors and can receive reports and alerts, either automatically or upon request wirelessly via the internet, email, mobile phone or an SMS. In addition, our dash camera provides critical video capture that can be used to help exonerate drivers when in accidents or help bolster training and coaching programs of employees. We also offers preventative solutions such as safety warning products to alert vehicle operators of objects or pedestrians in their pathway to prevent accidents, injuries, and damage. Our analytics platform features dashboards with KPIs and can help manager identify patterns, trends and outliers that can be used as flags for interventions.

 

Drive Operational Efficiency & Productivity: To increase utilization of mobile assets, our solutions enable the identification of a change in status, real-time location, geo-fencing alerts when an asset is approaching or leaving its destination, cargo status, and on-board intelligence utilizing a motion sensor and proprietary logic that identifies the beginning of a drive and the end of a drive. Having this information enables customers to increase capacity, speed of service, right-size their fleets, and improve communication internally and with customers. In addition, customers can reduce revenue per mile, reduce claims and claims processing times, and reduce the number of assets needed. This is achieved through proving such things as two-way integrated workflows for drivers, control assignments and work change, Electronic Driver Logging (“ELD”) and automated record keeping for regulatory compliance, monitoring of asset pools and geofence violations, and various reporting insights that flag under-utilized assets, the closest assets, and alerts on dwell time and exceeding the allotted time for loading and unloading.

 

We help customers to automate processes and increase productivity of their employees. Our applications enable customers to determine where operators are assigned and can temporarily reassign them based on peak needs, evaluate any disparity in the amount employees are paid compared to the time they actually spend operating a vehicle. Our applications help answer the question of why does it take some employees longer than others to do specific tasks, where to focus labor resources, and how to forecast vehicles and operators needed for future workflow.

 

In addition, for our rental car vertical, our applications automatically upload vehicle identification number, mileage and fuel data as a vehicle enters and exits the rental lot, which can significantly expedite the rental and return processes for travelers, and provide the rental company with more timely inventory status, more accurate billing data that can generate higher fuel-related revenue, and an opportunity to utilize customer service personnel for more productive activities, such as inspecting vehicles for damage and helping customers with luggage.

 

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Our solution for “car sharing” permits a rental car company to remotely control, track and monitor their rental vehicles wherever they are parked. Whether for traditional “pod-based” rental or for the emerging rent-anywhere model, the system, through APIs integrated into any rental company’s fleet management system, (i) manages member reservations by smart phone or Internet, and (ii) charges members for vehicle use by the hour.

 

For our customers with a variety of make-model-years in their fleet, we have developed an unmatched library of certified vehicle code interfaces through our second-generation On-Board Diagnostics (“OBD-II”), industry standard. Our patented fleet management system helps fleet owners improve asset utilization, reduce capital costs, and cut operating expenses, such as vehicle maintenance or service and support.

 

Increase Security: Our solutions allow our customers to reduce theft and improve inventory management. Customers can lockdown their assets with automated e-mail or text message alerts, emergency tracking of assets (higher frequency of reports) if theft is expected, geo-fencing alerts when an asset enters a prohibited geography or location, and near real-time sensors that alert based on changes in temperature and shock, among other things. We also provide stolen vehicle retrieval (“SVR”) services. Most of the SVR products used to provide our SVR services are mainly sold to (i) local car dealers and importers that in turn sell the products equipped in the vehicle to the end users who purchase the SVR services directly from us, or (ii) leasing companies which purchase our SVR services in order to secure their own vehicles.

 

Reduce Costs

 

We enable our customers to improve asset utilization, reduce capital costs, and cut operating expenses, such as vehicle maintenance or service and support. Our solutions provide engine performance, machine diagnostics, fuel consumption, and battery life to improve preventative maintenance scheduling, increase uptime, and gain a longer service life of equipment. Through our software applications, customers can optimize capacity, analyze resource allocation, and improve utilization of assets to reduce capital expenses such as purchasing new or leasing additional equipment. Our applications provide root cause analysis for any cargo claims and helps with exoneration of drivers in accidents via dash camera visibility.

 

Analytics and Machine Learning

 

Our analytics platforms provide our customers with a holistic view of their asset activity across their enterprise. For example, our image machine learning system allows us to process images from our freight camera and other sources and identify key aspects of operations and geospatial information such as location, work being accomplished, type of cargo, how cargo is loaded and if there are any visible issues such as damage.

 

Key Performance Indicators & Benchmarks

 

Our cloud-based software applications provide a single, integrated view of asset activity across multiple locations, generating enterprise-wide benchmarks, peer-industry comparisons, and deeper insights into asset operations. In addition, our customers can set real-time alerts for exception-based reporting or critical activity that needs immediate attention. This enables management teams to make more informed, effective decisions, raise asset performance standards, increase productivity, reduce costs, and enhance safety.

 

Specifically, our analytics platforms allow users to quantify best-practice enterprise benchmarks for asset utilization and safety, reveal variations and inefficiencies in asset activity across both sites and geographic regions, or identify opportunities to eliminate or reallocate assets, to reduce capital and operating costs. We provide an extensive set of decision-making tools and a variety of standard and customized reports to help businesses improve overall operations.

 

We look for analytics and machine learning to make a growing contribution to drive platform and SaaS revenue, further differentiate our offerings and add value to our solutions. We also use our analytics platform for our own internal platform quality control.

 

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Services

 

Hosting Services. We provide the use of our systems as a remotely hosted service, with the system server and application software residing in our colocation center or on a cloud platform provider’s infrastructure (e.g., Azure, AWS). This approach helps us reduce support costs and improve quality control. It separates the system from the restrictions of the customers’ local IT networks, which helps reduce their system support efforts and makes it easier for them to receive the benefits of system enhancements and upgrades. Our hosting services are typically offered with extended maintenance and support services over a multi-year term of service, with automatic renewals following the end of the initial term.

 

Software as a Service. We provide system monitoring, help desk technical support, escalation procedure development, routine diagnostic data analysis and software updates services as part of the ongoing contract term. These services ensure deployed systems remain in optimal performance condition throughout the contract term and provide access to newly developed features and functions on an annual basis.

 

Maintenance Services. We provide a warranty on the hardware components of our system. During the warranty period, we either replace or repair defective hardware. We also make extended maintenance contracts available to customers and offer ongoing maintenance and support on a time and materials basis.

 

Customer Support and Consulting Services for Ease of Use, Adoption, and Added Value. We have developed a framework for the various phases of system training and support that offer our customers both structure and flexibility. Major training phases include hardware installation and troubleshooting, software installation and troubleshooting, “train-the-trainer” training on asset hardware operation, preliminary software user training, system administrator training, information technology issue training, ad hoc training during system launch and advanced software user training.