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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

(Amendment No. 2)

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the fiscal year ended December 31, 2021.
   
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   (IRS 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)

 

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

 

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

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

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

 

The aggregate market value of the registrant’s common stock, par value $0.01 per share (“Common Stock”), held by non-affiliates, computed by reference to the price at which the Common Stock was last sold as of June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $237.7 million.

 

The number of shares of the registrant’s Common Stock outstanding as of August 4, 2022 was 36,189,756 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

Auditor Firm ID   Auditor Name   Auditor Location
42   Ernst & Young LLP   Iselin, New Jersey

 

 

 

   
 

 

explanatory note

 

This Amendment No. 2 on Form 10-K/A (this “Amendment No. 2”) further amends the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Annual Report”) of PowerFleet, Inc. filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2022 (the “Original Filing Date”), as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on May 2, 2022. In this Amendment No. 2, unless the context indicates otherwise, the designations “PowerFleet,” the “Company,” “we,” “us” or “our” refer to PowerFleet, Inc. and its subsidiaries.

 

This Amendment No. 2 is being filed solely to correct a typographical error in the Report of Independent Registered Public Accounting Firm (the “Audit Opinion”) of Ernst & Young LLP (“EY”) contained in the 2021 Annual Report, by replacing “December 31, 2020” with “December 31, 2021” under the section titled “Critical Audit Matters” in the Audit Opinion. In addition, this Amendment No. 2 includes a new consent of EY as Exhibit 23.1 hereto and new certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2, 32.1 and 32.2 hereto.

 

Pursuant to Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have repeated the entire text of Item 8 of the 2021 Annual Report in this Amendment No. 2. However, there have been no changes to the Company’s financial statements and notes thereto or the text of such item (other than the change stated in the immediately preceding paragraph to replace “December 31, 2020” with “December 31, 2021” under the section titled “Critical Audit Matters” in the Audit Opinion).

 

Except as described above, no other amendments are being made to the 2021 Annual Report. This Amendment No. 2 does not reflect events occurring after Original Filing Date or modify or update any disclosure contained in the 2021 Annual Report in any way other than to reflect the amendments discussed above and reflected below. Accordingly, this Amendment No. 2 should be read in conjunction with the 2021 Annual Report and our other filings with the SEC.

 

2
 

 

POWERFLEET, INC.

 

TABLE OF CONTENTS

 

    Page
     
PART II.  
Item 8. Financial Statements and Supplementary Data 4
     
PART IV.  
Item 15. Exhibits, Financial Statement Schedules 42

 

3
 

 

PART II

 

Item 8. Financial Statements and Supplementary Data.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 42) 5
Consolidated Balance Sheets at December 31, 2020 and 2021 7
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2020 and 2021 8
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2019, 2020 and 2021 9
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2019, 2020 and 2021 10
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2020 and 2021 11
Notes to the Consolidated Financial Statements 12

 

4
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the Board of Directors of PowerFleet, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of PowerFleet, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, cash flows, and changes in stockholders’ equity for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 16, 2022 expressed an adverse opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

    Income Taxes – Uncertain Tax Positions
Description of the Matter  

As discussed in Note 17 of the consolidated financial statements, the Company has recorded a liability of $0.5 million related to uncertain tax positions as of December 31, 2021. The Company conducts business in the US and various foreign countries and is therefore subject to US federal and state income taxes, as well as income taxes of multiple foreign jurisdictions. Due to the multinational operations of the Company and changes in global income tax laws and regulations, including those in the US, there is complexity in the accounting for and monitoring of the provision for uncertain tax positions.

 

Auditing management’s identification and measurement of uncertain tax positions involved complex analysis and auditor judgment related to the evaluation of the income tax consequences of changes in income tax laws and regulations in various jurisdictions, which are often subject to interpretation.

     
How We Addressed the Matter in Our Audit  

Our audit procedures included, among others, evaluating the Company’s assumptions and the underlying data used to identify its uncertain tax positions and to estimate the amount of the related unrecognized income tax benefits by jurisdiction. We obtained an understanding of the Company’s legal structure by reviewing its organizational charts and related legal documents. Due to the complexity of the tax law in various jurisdictions, we involved our income tax professionals to assess the Company’s interpretation of and compliance with tax laws in these jurisdictions, as well as to identify relevant tax law changes. In certain circumstances, we involved our income tax professionals to evaluate the technical merits of the Company’s tax positions and to evaluate income tax opinions or other third-party advice obtained by the Company. We also evaluated the Company’s income tax disclosures included in Note 17 to the consolidated financial statements in relation to these matters.

 

/s/ Ernst & Young LLP  
   
We served as the Company’s auditor since 2019.  
   
Iselin, New Jersey  
March 16, 2022  

 

5
 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of PowerFleet, Inc.

 

Opinion on Internal Control Over Financial Reporting

 

We have audited PowerFleet, Inc. and subsidiaries internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, PowerFleet, Inc. and subsidiaries (the Company) has not maintained effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness in controls related to various processes at the company’s Israel component.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, cash flows, and changes in stockholders’ equity for each of the three years in the period ended December 31, 2021, and the related notes. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report dated March 16, 2022, which expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Ernst & Young LLP

 

Iselin, New Jersey

March 16, 2022

 

6
 

 

POWERFLEET, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except per share data)

 

         
   As of December 31, 
   2020   2021 
         
ASSETS          
Current assets:          
Cash and cash equivalents  $18,127   $26,452 
Restricted cash   308    308 
Accounts receivable, net of allowance for doubtful accounts of $2,364 and $3,176 in 2020 and 2021, respectively   24,147    32,094 
Inventory, net   12,873    18,243 
Deferred costs - current   3,128    1,762 
Prepaid expenses and other current assets   6,184    9,051 
Total current assets   64,767    87,910 
           
Deferred costs - less current portion   2,233    249 
Fixed assets, net   8,804    8,988 
Goodwill   83,344    83,487 
Intangible assets, net   31,276    26,122 
Right of use asset   9,700    9,787 
Severance payable fund   4,056    4,359 
Deferred tax asset   

12,269

    

4,262

 
Other assets   3,115    4,703 
Total assets  $219,564   $229,867 
           
LIABILITIES          
Current liabilities:          
Short-term bank debt and current maturities of long-term debt   5,579    6,114 
Accounts payable and accrued expenses   20,225    29,015 
Deferred revenue - current   7,339    6,519 
Lease liability - current   2,755    2,640 
Total current liabilities   35,898    44,288 
           
Long-term debt, less current maturities   23,179    18,110 
Deferred revenue - less current portion   6,006    4,428 
Lease liability - less current portion   7,050    7,368 
Accrued severance payable   4,714    4,887 
Deferred tax liability   

10,763

    

5,220

 
Other long-term liabilities   674    706 
           
Total liabilities   88,284    85,007 
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 December 31, 2021   51,992    52,663 
           
Preferred stock; authorized 50,000 shares, $0.01 par value;   -    - 
Common stock; authorized 75,000 shares, $0.01 par value; 32,280 and 37,263 shares issued at December 31, 2020 and December 31, 2021, respectively; shares outstanding, 31,101 and 35,882 at December 31, 2020 and December 31, 2021, respectively   323    373 
Additional paid-in capital   206,499    234,083 
Accumulated deficit   (121,150)   (134,437)
Accumulated other comprehensive gain (loss)   399    391 
Treasury stock; 1,179 and 1,381 common shares at cost at December 31, 2020 and December 31, 2021, respectively   (6,858)   (8,299)
           
Total Powerfleet, Inc. stockholders’ equity   79,213    92,111 
Non-controlling interest   75    86 
Total equity   79,288    92,197 
Total liabilities and stockholders’ equity  $219,564   $229,867 

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7
 

 

POWERFLEET, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share data)

 

          
   Year Ended December 31, 
   2019   2020   2021 
             
Revenues:               
Products  $45,416   $45,651   $52,981 
Services   36,499    67,942    73,227 
Total revenues   81,915    113,593    126,208 
                
Cost of Revenues:               
Cost of products   29,982    30,219    39,445 
Cost of services   13,569    24,357    26,580 
            
Total cost of revenue   43,551    54,576    66,025 
                
Gross profit   38,364    59,017    60,183 
                
Operating expenses:               
Selling, general and administrative expenses   34,447    51,878    57,100 
Research and development expenses   8,540    10,597    11,058 
Acquisition related expenses   5,135    -    - 
                
Total Operating expenses   48,122    62,475    68,158 
                
Loss from operations   (9,758)   (3,458)   (7,975)
Interest income   125    55    45 
Interest expense   (1,373)   (4,467)   (2,764)
Other (expense) income, net   (50)   (102)   8 
                
Net loss before income taxes   (11,056)   (7,972)   (10,686)
                
Income tax benefit (expense)   75    (1,038)   (2,607)
                
Net loss before non-controlling interest   (10,981)   (9,010)   (13,293)
Non-controlling interest   18    3    5 
                
Net loss   (10,963)   (9,007)   (13,288)
Accretion of preferred stock   (168)   (672)   (672)
Preferred stock dividends   (916)   (3,927)   (4,112)
                
Net loss attributable to common stockholders  $(12,047)  $(13,606)  $(18,072)
                
Net loss per share attributable to common stockholders - basic and diluted  $(0.59)  $(0.46)  $(0.52)
                
Weighted average common shares outstanding - basic and diluted   20,476    29,703    34,571 

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8
 

 

POWERFLEET, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

(In thousands, except per share data)

 

             
   December 31, 
   2019   2020   2021 
             
Net loss attributable to common stockholders  $(12,047)  $(13,606)  $(18,072)
                
Other comprehensive (loss) income, net:               
                
Unrealized (loss) gain on investments   9    -    - 
Reclassification of net realized investment loss (gain) included in net loss   38    -    - 
Foreign currency translation adjustment   653    134    (8)
                
Total other comprehensive income (loss), net   700    134    (8)
                
Comprehensive loss  $(11,347)  $(13,472)  $(18,080)

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9
 

 

POWERFLEET, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except per share data)

 

                                 
   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, 2019        19,178   $192   $138,693   $(101,180)  $(435)  $(5,736)  $-   $31,534 
                                                                    
Net loss attributable to common stockholders   -    -    (1,084)   (10,963)   -    -    -    (12,047)
Foreign currency translation adjustment   -    -    -    -    653    -    8    661 
Reclassification of realized losses on investments, net of unrealized amounts   -    -    -    -    47    -    -    47 
Shares issued pursuant to Pointer Transactions   10,756    107    57,973    -    -    -    -    58,080 
Share based awards assumed Pointer Transaction        -    246    -    -    -    -    246 
Shares issued relating to Keytroller acquisition consideration   148    1    999    -    -    -    -    1,000 
Shares issued pursuant to CarrierWeb acquisition   71    1    405    -    -    -    -    406 
Shares issued pursuant to exercise of stock options   59    1    221    -    -    -    -    222 
Issuance of restricted shares   625    6    (6)   -    -    -    -    - 
Forfeiture of restricted shares   (40)   -         -    -    -    -    - 
Vesting of restricted stock units   7    -    -     -    -    -    -    - 
Shares withheld pursuant to vesting of restricted stock   -    -    -     -    -    (317)   -    (317)
Stock based compensation   -    -    4,213    -    -    -    -    4,213 
Net loss attributable to non-controlling interest   -    -    -    -    -    -    (18)   (18)
Other   -    -    153    -    -    -    -    153 
Balance at December 31, 2019   30,804   $308   $201,813   $(112,143)  $265   $(6,053)  $(10)  $84,180 
                                         
Net loss attributable to common stockholders   -    -    (4,599)   (9,007)   -    -    -    (13,606)
Net loss attributable to non-controlling interest   -    -    -    -    -    -    (3)   (3)
Foreign currency translation adjustment   -    -    -    -    134    -    88    222 
Issuance of restricted shares   461    4    (4)   -    -    -    -    - 
Forfeiture of restricted shares   (143)   (1)   1    -    -    -    -    - 
Vesting of restricted stock units   149    1    (1)   -    -    -    -    - 
Other   -    -    62    -    -    -    -    62 
Shares issued pursuant to exercise of stock options   199    3    935    -    -    -    -    938 
Shares withheld pursuant to exercise of stock options   -    -    -    -    -    (382)   -    (382)
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (423)   -    (423)
Common shares issued   810    8    4,033    -    -    -    -    4,041 
Stock based compensation   -    -    4,259    -    -    -    -    4,259 
Balance at December 31, 2020   32,280   $323   $206,499   $(121,150)  $399   $(6,858)  $75   $79,288 
                                         
Net loss attributable to common stockholders   -    -    (4,785)   (13,287)   -    -    -    (18,072)
Net loss attributable to non-controlling interest   -    -    -    -    -    -    (5)   (5)
Foreign currency translation adjustment   -    -    -    -    (8)   -    16    8 
Issuance of restricted shares   449    5    (4)   -    -    -    -    1 
Forfeiture of restricted shares   (89)   (1)   -    -    -    -    -    (1)
Vesting of restricted stock units   39    -    -    -    -    -    -    - 
Shares issued pursuant to exercise of stock options   156    2    875    -    -    -    -    877 
Shares withheld pursuant to exercise of stock options   -    -    -    -    -    (647)   -    (647)
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (794)   -    (794)
Common shares issued, net of issuance costs   4,428    44    26,822    -    -    -    -    26,866 
Stock based compensation   -    -    4,676    -    -    -    -    4,676 
Balance at December 31, 2021   37,263   $373   $234,083   $(134,437)  $391   $(8,299)  $86   $92,197 

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

10
 

 

POWERFLEET, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

In thousands (except per share data)

 

             
   Year Ended December 31, 
   2019   2020   2021 
             
Cash flows from operating activities (net of net assets acquired):               
Net loss  $(10,963)  $(9,007)  $(13,288)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:               
Non-controlling interest   (18)   (3)   (5)
Inventory reserve   207    260    (22)
Stock based compensation expense   3,794    4,259    4,676 
Depreciation and amortization   3,347    8,425    8,553 
Right-of-use assets, non-cash lease expense   965    2,832    2,859 
Bad debt expense   474    1,035    1,442 
Change in contingent consideration   54    -    - 
Deferred income taxes   -    359    2,607 
Other non-cash items   (40)   23    305 
Changes in:               
Accounts receivable   (1,297)   2,168    (9,643)
Inventory   (3,283)   3,050    (6,058)
Prepaid expenses and other assets   567    1,908    (2,918)
Deferred costs   539    3,169    3,349 
Deferred revenue   (857)   (4,326)   (2,290)
Accounts payable and accrued expenses   360    (2,392)   8,300 
Lease liabilities   (1,106)   (2,962)   (2,741)
Accrued severance payable, net   (12)   50    (145)
                
Net cash (used in) provided by operating activities   (7,269)   8,848    (5,019)
                
Cash flows from investing activities:               
Acquisitions, net of cash assumed   (69,005)   -    - 
Proceeds from sale of property and equipment   24    75    - 
Capital expenditures   (1,042)   (3,373)   (3,398)
Purchases of investments   (99)   -    - 
Proceeds from the sale and maturities of investments   4,638    -    - 
                
Net cash (used in) provided by investing activities   (65,484)   (3,298)   (3,398)
                
Cash flows from financing activities:               
Net proceeds from stock offering   46,309    4,041    26,867 
Payment of preferred stock dividends   -    -    (4,112)
Proceeds from convertible note   5,000    -    - 
Repayment of convertible note   -    (5,000)   - 
Proceeds from long-term-debt   30,000    -    - 
Repayment of long-term debt   (2,010)   (2,858)   (5,709)
Debt issuance costs   (742)   -    - 
Short-term bank debt, net   75    (262)   (270)
Proceeds from exercise of stock options, net   330    556    229 
Purchase of treasury stock upon vesting of restricted stock   (317)   (423)   (794)
                
Net cash (used in) provided by financing activities   78,645    (3,946)   16,211 
                
Effect of foreign exchange rate changes on cash and cash equivalents   345    128    531 
Net (decrease) increase in cash, cash equivalents and restricted cash   6,237    1,732    8,325 
Cash, cash equivalents and restricted cash - beginning of period   10,466    16,703    18,435 
                
Cash, cash equivalents and restricted cash - end of period  $16,703   $18,435   $26,760 
                
Reconciliation of cash, cash equivalents, and restricted cash, beginning of period               
Cash and cash equivalents   10,159    16,395    18,127 
Restricted cash   307    308    308 
Cash, cash equivalents, and restricted cash, beginning of period  $10,466   $16,703   $18,435 
                
Reconciliation of cash, cash equivalents, and restricted cash, end of period               
Cash and cash equivalents   16,395    18,127    26,452 
Restricted cash   308    308    308 
Cash, cash equivalents, and restricted cash, end of period  $16,703   $18,435   $26,760 
                
Supplemental disclosure of cash flow information:               
Cash paid for:               
Taxes   605    47    58 
Interest   807    2,297    1,474 
                
Noncash investing and financing activities:               
Unrealized (loss) gain on investments  $47   $-   $- 
Value of shares withheld pursuant to exercise of stock options  $-   $382   $647 
Value of shares issued relating to acquisition contingent consideration  $1,000   $-   $- 
Value of shares issued pursuant to acquisitions  $(58,486)  $-   $- 

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11
 

 

POWERFLEET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 and 2021

In thousands (except per share data)

 

NOTE 1 - DESCRIPTION OF BUSINESS AND LIQUIDITY

  

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. 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 pursuant to which the Company acquired Pointer Telocation Ltd. (the “Transactions”) and commenced operations on October 3, 2019, upon the closing of the Transactions.

 

Impact of COVID-19 and Supply Chain Disruptions

 

The global outbreak of 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.

 

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. The Company incurred supply chain constraint expenses which lowered its gross margins and decreased its profitability primarily during the last six months of 2021. 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 audited 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.

 

Liquidity

 

As of December 31, 2021, the Company had cash (including restricted cash) and cash equivalents of $26,760 and working capital of $43,622. 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 Telocation Ltd. (“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 as of December 31, 2021. See Note 11 for additional information.

 

12
 

 

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 May 14, 2020, we 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. We terminated the equity distribution agreement effective as of August 14, 2020. See Note 14 for additional information regarding the ATM 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 ATM Offering and 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 2020 and 2021 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 March 16, 2023.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

[A] Principles of consolidation:

 

The consolidated financial statements include the accounts of PowerFleet Inc. and its subsidiaries (which, as noted above, are collectively referred to herein as the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.

 

[B] 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, accounting for uncertain tax positions, the impairment of intangible assets, including goodwill, and stand-alone selling price related to multiple element revenue arrangements. Actual results could differ from those estimates.

 

As of December 31, 2021, the impact of the COVID-19 pandemic 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.

 

[C] 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 2021 consists of cash held in escrow for purchases from a vendor

 

13
 

 

[D] Accounts receivable:

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains reserves against its accounts receivable for potential losses. Allowances for uncollectible accounts are estimated based on the Company’s periodic review of accounts receivable balances. In establishing the required allowance, management considers our customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Accounts receivable are net of an allowance for doubtful accounts in the amount of $2,364 and $3,176 in 2020 and 2021, respectively. The Company does not have any off-balance sheet credit exposure related to its customers.

 

[E] 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 13).

 

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.

 

14
 

 

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.

 

[F] Deferred costs:

 

Deferred product costs consist of Powerfleet for Logistics 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.

 

[G] Inventory:

 

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the “moving average” cost method or the first-in first-out (“FIFO”) method. Inventory consists of components, work in process and finished products

 

Inventory valuation reserves are established in order to report inventories at the lower of cost or net realizable value in the consolidated balance sheet. The determination of inventory valuation reserves requires management to make estimates and judgments on the future salability of inventories. Valuation reserves for obsolete and slow-moving inventory are estimated based on assumptions of future sales forecasts, product life cycle expectations, the impact of new product introductions, production requirements, and specific identification of items, such as product discontinuance or engineering/material changes and by comparing the inventory levels to historical usage rates

 

[H] Fixed assets and depreciation:

 

Fixed assets are recorded at cost, net of accumulated depreciation. Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the assets. The following table provides the range of estimated useful lives used for each asset type:

 

  

Useful Life

(years)

Computer software  3 - 5
Installed products  3 - 5
Computers and electronic equipment  3 - 10
Furniture and fixtures  5 - 7
Leasehold improvements  Shorter of useful life or lease term

 

15
 

 

[I] Long-lived assets:

 

Long-lived assets, which includes definite lived intangible assets and fixed assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets and would be charged to earnings. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

[J] Goodwill and intangibles:

 

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized and are tested for impairment on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets other than goodwill are amortized over their useful lives unless the lives are determined to be indefinite. Intangible assets are carried at cost, less accumulated amortization. Intangible assets consist of trademarks and trade name, patents, customer relationships and other intangible assets. Goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. The Company operates in one operating segment which is its only reporting unit. The Company tests its goodwill for impairment annually which is the first day of the Company’s fourth quarter or when an indicator of impairment exists, by comparing the fair value of the reporting unit to its carrying value

 

In the evaluation of goodwill for impairment, the Company has the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. By eliminating “Step 2” from the goodwill impairment test, the quantitative analysis of goodwill will result in an impairment loss for the amount that the carrying value of the reporting unit exceeds its fair value which is limited to the total amount of goodwill allocated to the reporting unit. The Company performed a market-based quantitative assessment utilizing the guideline public company and guideline transaction approaches by comparing revenue and adjusted EBITDA multiples of similar sized companies and similar sized transactions. For the years ended December 31, 2019, 2020, and 2021, the Company did not incur an impairment charge.

 

[K] Product warranties:

 

The Company typically provides a 1 – 3-year warranty on its products. Estimated future warranty costs are accrued in the period that the related revenue is recognized. These estimates are derived from historical data and trends of product reliability and costs of repairing and replacing defective products.

 

[L] Research and development:

 

Research and development costs are charged to expense as incurred and consists primarily of salaries and related expenses, supplies and contractor costs. Research and development costs were $8,540, $10,597, and $11,058 in 2019, 2020 and 2021, respectively.

 

[M] Patent costs:

 

Cost incurred in connection with acquiring patent rights are charged to expense as incurred.

 

16
 

 

[N] Concentrations of credit risk:

 

Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, trade receivables and trade payables

 

The Company’s cash and cash equivalents are invested primarily in deposits with major banks worldwide. Generally, these deposits may be redeemed upon demand and, therefore, bear low risk. Management believes that the financial institutions that hold the Company’s investments have a high credit rating.

 

For the year ended December 31, 2021, 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.

 

For the year ended December 31, 2020, 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.

 

For the year ended December 31, 2019, one customer accounted for 20% of the Company’s revenue.

 

[O] Benefit plan:

 

The Company maintains a retirement plan under Section 401(k) of the Internal Revenue Code, which covers all eligible employees. All employees with U.S. source income are eligible to participate in the plan immediately upon employment. The Company did not make any contributions to the plan during the years ended December 31, 2019, 2020 and 2021.

 

[P] Severance pay:

 

The liability of the Company’s subsidiaries in Israel for severance pay is calculated pursuant to Israel’s Severance Pay Law 5273-1963 (the “Severance Law”) based on the most recent salary of the employees multiplied by the number of years of employment as of balance sheet date and are presented on an undiscounted basis (the “Shut Down Method”). Employees are entitled to one month’s salary for each year of employment, or a portion thereof. The liability for the Company and its subsidiaries in Israel is fully provided by monthly deposits with insurance policies and by accrual. The value of these policies is recorded as an asset in the Company’s balance sheet.

 

The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to the Severance Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes profits or losses accumulated to balance sheet date.

 

Some of the Company’s employees are subject to Section 14 of the Severance Law and the General Approval of the Labor Minister dated June 30, 1998, issued in accordance to the said Section 14, mandating that upon termination of such employees’ employment, all the amounts accrued in their insurance policies shall be released to them. The severance pay liabilities and deposits covered by these plans are not reflected in the balance sheet as the severance pay risks have been irrevocably transferred to the severance funds.

 

[Q] Stock-based compensation:

 

The Company accounts for stock-based employee compensation for all share-based payments, including grants of stock options and restricted stock, as an operating expense based on their fair values on grant date. The Company recorded stock-based compensation expense of $3,794, $4,142, and $4,416 for the years ended December 31, 2019, 2020 and 2021, respectively.

 

The Company estimates the fair value of share-based option awards on the grant date using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s consolidated statement of operations. The Company estimates forfeitures at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The estimate is based on the Company’s historical rates of forfeitures. Estimated forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

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[R] Income taxes:

 

The Company uses the asset and liability method of accounting for deferred income taxes. Deferred income taxes are measured by applying enacted statutory rates to net operating loss carryforwards and to the differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets are reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

The Company recognizes uncertainty in income taxes in the financial statements using a recognition threshold and measurement attribute of a tax position taken or expected to be taken in a tax return. The Company applies the “more-likely-than-not” recognition threshold to all tax positions, commencing at the adoption date of the applicable accounting guidance, which resulted in no unrecognized tax benefits as of such date. Additionally, there have been no unrecognized tax benefits subsequent to adoption. The Company has opted to classify interest and penalties that would accrue according to the provisions of relevant tax law as selling, general, and administrative expenses and incomes taxes, respectively, in the consolidated statement of operations. For the years ended December 31, 2019, 2020 and 2021, interest and penalties were immaterial.

 

[S] Fair value of financial instruments:

 

The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those levels

 

  Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities
  Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
  Level 3: Unobservable inputs that reflect the reporting entity’s estimates of market participant assumptions

 

The Company’s cash and cash equivalents and investments in securities 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.

 

 SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS

   December 31, 2021 
  

Carrying

Amount

  

Fair

Value

 
Long term debt  $24,224   $24,224 

 

[T] Advertising and marketing expense:

 

Advertising and marketing costs are expensed as incurred. Advertising and marketing expense for the years ended December 31, 2019, 2020 and 2021 amounted to $1,228, $1,022, and $1,185, respectively.

 

[U] Foreign currency translation:

 

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 are $653, $134 and $(8) at December 31, 2019, 2020 and 2021, respectively, which are included in comprehensive loss in the Consolidated Statement of Changes in Stockholders’ Equity.

 

18
 

 

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 gains (losses) for the years ended December 31, 2019, 2020 and 2021 of $(42), $148 and $(128), 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 $(425), $(2,137) and $810, respectively, for the years ended December 31, 2019, 2020 and 2021, are included in interest expense in the Consolidated Statement of Operations.

 

[V] Commitments and contingencies:

 

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.

 

[W] Recently issued accounting pronouncements:

 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Simplifying the Accounting for Income Taxes which removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, the recognition of deferred tax liabilities for outside basis differences and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is generally effective as of January 1, 2021, with early adoption permitted. The adoption of the standard did not have an impact on the Company’s consolidated financial statements.

 

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, 2021. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance requires a prospective adoption. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

 

[Y] 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.

 

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NOTE 3 - ACQUISITIONS

 

Pointer Transactions

 

On October 3, 2019, the Company completed the Transactions, as a result of which I.D. Systems, Inc. (“I.D. Systems”) and PowerFleet Israel each became direct wholly-owned subsidiaries of the Company and Pointer became an indirect, wholly-owned subsidiary of the Company. Prior to the Transactions, PowerFleet, Inc. 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 the Company and the results of Pointer have been included in the Company’s consolidated financial statements from the date of the Transactions.

 

The purchase method of accounting in accordance with ASC805, Business Combinations, was applied for the Transactions. This requires the total cost of an acquisition to be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess cost accounted for as goodwill. Goodwill arising from the acquisition is attributable to expected product and sales synergies from combining the operations of the acquired business with those of the Company. I.D. Systems has been determined to be the accounting acquirer in the Transactions.

 

The following table summarizes the final purchase price allocation based on estimated fair values of the net assets acquired at the acquisition date:

SCHEDULE OF PURCHASE PRICE ALLOCATION ON NET ASSETS ACQUIRED 

      
Accounts receivable  $19,701 
Inventory   8,666 
Other assets   32,073 
Customer relationships   15,610 
Trademark and tradename   6,096 
Technology   10,911 
Goodwill (a)   72,918 
Less: Current liabilities assumed   (21,055)
Less: Non current liabilities assumed   (14,504)
Net assets acquired  $130,416 

 

  (a) The goodwill is not deductible for tax purposes.

 

The results of operations of Pointer have been included in the consolidated statement of operations as of the effective date of the Transactions. The following revenue and operating income of Pointer are included in the Company’s consolidated results of operations for the year ended December 31, 2019:

 SCHEDULE OF PRO FORMA REVENUE AND EARNINGS

      
Revenues  $18,594 
Operating loss  $(1,665)

 

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CarrierWeb Acquisitions

 

On January 30, 2019, the Company completed the acquisition of substantially all of the assets of CarrierWeb, L.L.C. and on July 30, 2019, the Company completed the acquisition of substantially all of the assets of CarrierWeb Services Ltd. (collectively, the “CarrierWeb Acquisitions”).

 

The purchase method of accounting in accordance with ASC805, Business Combinations, was applied for the CarrierWeb Acquisitions. This requires the total cost of an acquisition to be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess cost accounted for as goodwill. Goodwill arising from the acquisition is attributable to expected product and sales synergies from combining the operations of the acquired business with those of the Company.

 

The following table summarizes the final purchase price allocation of the CarrierWeb Acquisitions based on the fair values of the net assets acquired at the acquisition date:

 

SCHEDULE OF PURCHASE PRICE ALLOCATION ON NET ASSETS ACQUIRED

      
Accounts receivable  $192 
Inventory   200 
Other assets   26 
Customer relationships   531 
Trademark and tradename   90 
Patents   628 
Goodwill (a)   3,108 
Net assets acquired  $4,775 

 

  (a) The goodwill is fully deductible for tax purposes.

 

The results of operations from each of the CarrierWeb Acquisitions have been included in the consolidated statement of operations as of the effective date of each such acquisition. For the year ended December 31, 2019, the CarrierWeb Acquisitions contributed an aggregate of approximately $3,809 to the Company’s revenues. Operating income contributed by the CarrierWeb Acquisitions was not separately identifiable due to Company’s integration activities and is impracticable to provide.

 

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The following table represents the combined pro forma revenue and earnings for the year ended December 31, 2019:

 

SCHEDULE OF PRO FORMA REVENUE AND EARNINGS

   Year Ended 
   December 31, 2019 (b) 
   Historical   Pro Forma Combined 
       (Unaudited) 
Revenues  $81,915   $135,126 
Operating loss   (10,183)   (10,833)
Net loss per share - basic and diluted  $(0.59)  $(0.66)

 

  (b) Includes pro forma results for the Transactions. Pro forma results for the CarrierWeb Acquisitions are impracticable to provide as the acquisition was a carve-out from a bankruptcy transaction.

 

The combined pro forma revenue and earnings for the year ended 2019 for the Transactions were prepared as though such transactions had occurred as of January 1, 2019. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of Pointer. This summary is not necessarily indicative of what the results of operations would have been had the Transactions occurred during such period, nor does it purport to represent results of operations for any future periods.

 

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NOTE 4 - REVENUE RECOGNITION

 

The following table presents the Company’s revenues disaggregated by revenue source for the years ended December 31, 2019, 2020 and 2021.

 

   Year Ended December 31, 
   2019   2020   2021 
             
Products  $45,416   $45,651   $52,981 
Services   36,499    67,942    73,227 
                
   $81,915   $113,593   $126,208 

 

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

   Year Ended December 31, 
   2020   2021 
         
Assets:          
Deferred contract costs  $2,157   $3,045 
Deferred costs  $5,361   $2,011 
           
Liabilities:          
Deferred revenue- services (1)  $6,578   $8,401 
Deferred revenue - products (1)   6,767    2,546 
           
    13,345    10,947 
Less: Deferred revenue current portion   (7,339)   (6,519)
           
Deferred revenue long term  $6,006   $4,428 

 

(1) The Company record deferred revenues when cash payments are received or due in advance of the Company’s performance. For the years ended December 31, 2020 and 2021, the Company recognized revenue of $10,242 and $10,249, respectively, that was included in the deferred revenue balance at the beginning of each reporting period. The Company expects to recognize as revenue before year 2026, when it transfers those goods and services and, therefore, satisfies its performance obligation to the customers.

 

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NOTE 5 – PREPAID EXPENSES AND OTHER ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

   2020   2021 
   Year Ended December 31, 
   2020   2021 
         
Finance receivables, current  $692   $786 
Prepaid expenses   2,979    4,580 
Contract assets   767    1,124 
Other current assets   1,746    2,561 
           
Prepaid expenses and other current assets  $6,184   $9,051 

 

NOTE 6 - INVENTORIES

 

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the “moving average” cost method or the first-in first-out (FIFO) method. Inventory consists of components, work in process and finished products. Inventories are shown net of valuation reserves of $515 and $260 at December 31, 2020 and 2021, respectively.

 

Inventories consist of the following:

  

       
   Year Ended December 31, 
   2020   2021 
         
Components  $7,697   $11,137 
Work in process   237    699 
Finished goods, net   4,939    6,407 
           
Inventory, Net  $12,873   $18,243 

 

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NOTE 7 - FIXED ASSETS

 

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

SCHEDULE OF FIXED ASSETS 

   Year Ended December 31, 
   2020   2021 
         
Installed products  $4,174   $6,190 
Computer software   5,882    6,732 
Computer and electronic equipment   5,273    5,688 
Furniture and fixtures   1,828    2,246 
Leasehold improvements   1,353    1,445 
           
    18,510    22,301 
Accumulated depreciation and amortization   (9,706)   (13,313)
   $8,804   $8,988 

 

Depreciation and amortization expense for the years ended December 31, 2019, 2020 and 2021 was $1,380, $3,097, and $3,399, respectively. This includes amortization of costs associated with computer software for the years ended December 31, 2019, 2020 and 2021 of $528, $515, and $426, respectively.

 

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NOTE 8 - INTANGIBLE ASSETS AND GOODWILL

 

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

 

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 

 

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