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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: September 30, 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 November 3, 2022, was 36,170,937.

 

 

 

 

 

 

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 September 30, 2022 (unaudited) 3
   
Condensed Consolidated Statements of Operations (unaudited) - for the three and nine months ended September 30, 2021 and 2022 4
   
Condensed Consolidated Statements of Comprehensive Loss (unaudited) - for the three and nine months ended September 30, 2021 and 2022 5
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) - for the periods January 1, 2021 through September 30, 2021 and January 1, 2022 through September 30, 2022 6
   
Condensed Consolidated Statements of Cash Flows (unaudited) - for the nine months ended September 30, 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 35
   
Item 4. Controls and Procedures 35
   
PART II - OTHER INFORMATION 36
   
Item 1. Legal Proceedings 36
   
Item 1A. Risk Factors 36
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
   
Item 6. Exhibits 37
   
Signatures 38
   
Exhibit 31.1  
Exhibit 31.2  
Exhibit 32  

 

2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

POWERFLEET, INC. AND SUBSIDIARIES

Condensed Balance Sheets

(In thousands, except per share data)

 

     December 31, 2021*     September 30, 2022 
       (Unaudited) 
ASSETS          
Current assets:          
Cash and cash equivalents  $26,452   $16,703 
Restricted cash   308    309 
Accounts receivable, net of allowance for doubtful accounts of $3,176 and $2,835 in 2021 and 2022, respectively   32,094    33,352 
Inventory, net   18,243    23,572 
Deferred costs - current   1,762    1,025 
Prepaid expenses and other current assets   9,051    8,868 
Total current assets   87,910    83,829 
           
Deferred costs - less current portion   249    - 
Fixed assets, net   8,988    8,994 
Goodwill   83,487    83,487 
Intangible assets, net   26,122    23,312 
Right of use asset   9,787    7,999 
Severance payable fund   4,359    3,614 
Deferred tax asset   4,262    3,740 
Other assets   4,703    5,086 
Total assets  $229,867   $220,061 
           
LIABILITIES          
Current liabilities:          
Short-term bank debt and current maturities of long-term debt   6,114    9,366 
Accounts payable and accrued expenses   29,015    28,818 
Deferred revenue - current   6,519    6,523 
Lease liability - current   2,640    2,464 
Total current liabilities   44,288    47,171 
           
Long-term debt, less current maturities   18,110    11,914 
Deferred revenue - less current portion   4,428    4,208 
Lease liability - less current portion   7,368    5,793 
Accrued severance payable   4,887    4,148 
Deferred tax liability   5,220    5,182 
Other long-term liabilities   706    628 
           
Total liabilities   85,007    79,044 
Commitments and Contingencies (note 20)   -       
           
MEZZANINE EQUITY          
Convertible redeemable preferred stock: Series A – 100 shares authorized, $0.01 par value; 55 and 58 shares issued and outstanding at December 31, 2021 and September 30, 2022   52,663    56,309 
           
Preferred stock; authorized 50,000 shares, $0.01 par value;   -    - 
Common stock; authorized 75,000 shares, $0.01 par value; 37,263 and 37,584 shares issued at December 31, 2021 and September 30, 2022, respectively; shares outstanding, 35,882 and 36,156 at December 31, 2021 and September 30, 2022, respectively   373    376 
Additional paid-in capital   234,083    233,590 
Accumulated deficit   (134,437)   (139,784)
Accumulated other comprehensive gain (loss)   391    (1,050)
Treasury stock; 1,381 and 1,429 common shares at cost at December 31, 2021 and September 30, 2022, respectively   (8,299)   (8,492)
           
Total Powerfleet, Inc. stockholders’ equity   92,111    84,640 
Non-controlling interest   86    68 
Total equity   92,197    84,708 
Total liabilities and stockholders’ equity  $229,867   $220,061 

 

* 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   2021   2022 
  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2021   2022   2021   2022 
                 
Revenues:                    
Products  $10,785   $14,021   $37,671   $43,231 
Services   18,461    20,267    54,114    58,812 
Total revenues   29,246    34,288    91,785    102,043 
                     
Cost of Revenues:                    
Cost of products   8,172    9,839    27,186    33,152 
Cost of services   6,809    7,268    19,819    21,081 
 Total cost of revenues   14,981    17,107    47,005    54,233 
                     
Gross profit   14,265    17,181    44,780    47,810 
                     
Operating expenses:                    
Selling, general and administrative expenses   13,959    16,664    40,988    47,393 
Research and development expenses   2,735    1,735    8,259    6,965 
 Total Operating expenses   16,694    18,399    49,247    54,358 
                     
Loss from operations   (2,429)   (1,218)   (4,467)   (6,548)
Interest income   11    20    35    48 
Interest expense   (777)   (331)   (1,446)   1,262 
Other (expense) income, net   7    -    5    1 
                     
Net loss before income taxes   (3,188)   (1,529)   (5,873)   (5,237)
                     
Income tax benefit (expense)   (161)   (770)   (701)   (107)
                     
Net loss before non-controlling interest   (3,349)   (2,299)   (6,574)   (5,344)
Non-controlling interest   4    (1)   5    (3)
                     
Net loss   (3,345)   (2,300)   (6,569)   (5,347)
Accretion of preferred stock   (168)   (168)   (504)   (504)
Preferred stock dividend   (1,028)   (1,067)   (3,084)   (3,143)
                     
Net loss attributable to common stockholders  $(4,541)  $(3,535)  $(10,157)  $(8,994)
                     
Net loss per share attributable to common stockholders - basic and diluted  $(0.13)  $(0.10)  $(0.30)  $(0.25)
                     
Weighted average common shares outstanding - basic and diluted   35,019    35,406    34,398    35,375 

 

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   2021   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2021   2022   2021   2022 
                 
Net loss attributable to common stockholders  $(4,541)  $(3,535)  $(10,157)  $(8,994)
                     
Other comprehensive (loss) income, net:                    
                     
Foreign currency translation adjustment   (92)   12    (423)   (1,441)
                     
Total other comprehensive income (loss)   (92)   12    (423)   (1,441)
                     
Comprehensive loss  $(4,633)  $(3,523)  $(10,580)  $(10,435)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

 

POWERFLEET, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(In thousands, except per share data)

(Unaudited)

 

   Number of Shares   Amount  

Paid-in
Capital

   Accumulated
Deficit
  

Comprehensive Income (Loss)

   Treasury Stock  

controlling Interest

   Stockholders’
Equity
 
   Common Stock   Additional       Other       Non-     
   Number of Shares   Amount  

Paid-in
Capital

   Accumulated
Deficit
  

Comprehensive Income (Loss)

   Treasury Stock  

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 income 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 withheld pursuant to vesting of restricted stock   -    -    -    -    -    (181)   -    (181)
Stock based compensation   -    -    457    -    -    -    -    457 
Balance at March 31, 2022   37,570   $376   $233,342   $(137,366)  $644   $(8,480)  $102   $88,618 
Net loss attributable to common stockholders   -    -    (1,216)   (118)   -    -    -    (1,334)
Net income attributable to non-controlling interest   -    -    -    -    -    -    1    1 
Foreign currency translation adjustment   -    -    -    -    (1,706)   -    (18)   (1,724)
Forfeiture of restricted shares   (24)   (1)   1    -    -    -    -    - 
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (5)   -    (5)
Stock based compensation   -    -    1,629    -    -    -    -    1,629 
Balance at June 30, 2022   37,546   $375   $233,756   $(137,484)  $(1,062)  $(8,485)  $85   $87,185 
Net loss attributable to common stockholders   -    -    (1,235)   (2,300)   -    -    -    (3,535)
Net income attributable to non-controlling interest   -    -    -    -    -    -    1    1 
Issuance of restricted stock   78    1    (1)   -     -     -     -     -  
Foreign currency translation adjustment   -    -    -    -    12    -     (18)   (6)
Forfeiture of restricted shares   (40)   -    -    -    -    -    -    - 
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (7)   -    (7)
Stock based compensation   -    -    1,070    -     -     -     -     1,070 
Balance at September 30, 2022   37,584   $376   $233,590   $(139,784)  $(1,050)  $(8,492)  $68   $84,708 

 

   Common Stock           Accumulated              
   Number of
Shares
   Amount   Additional Paid-in Capital   Accumulated Deficit   Other Comprehensive Income (Loss)   Treasury Stock    Non-controlling Interest   Stockholders’
Equity
 
                                  
Balance at January 1, 2021   32,280   $323   $206,499   $(121,150)  $399    $(6,858)   $75   $          79,288 
                                          
Net loss attributable to common stockholders   -    -    (1,196)   (1,787)   -    -     -    (2,983)
Foreign currency translation adjustment   -    -    -    -    (1,334)   -     (2)   (1,336)
Issuance of restricted shares   415    4    (4)   -    -    -     -    - 
Forfeiture of restricted shares   (6)   -    -    -    -    -     -    - 
Vesting of restricted stock units   34         -    -    -    -     -    - 
Shares issued pursuant to exercise of stock options   129    1    716    -    -    -     -    717 
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (347)    -    (347)
                                          
Shares withheld pursuant to exercise of stock options   -    -    -    -    -    (647)    -    (647)
Stock based compensation   -    -    1,357    -    -    -     -    1,357 
Common shares issued, net of issuance costs   4,428    44    26,822    -    -    -     -    26,866 
Balance at March 31, 2021   37,280   $372   $234,194   $(122,937)  $(935)   $(7,852)   $73   $102,915 
Net loss attributable to common stockholders   -    -    (1,195)   (1,438)   -    -     -    (2,633)
Net loss attributable to non-controlling interest   -    -    -    -    -    -     (1)   (1)
Foreign currency translation adjustment   -    -    -    -    1,003    -     7    1,010 
Forfeiture of restricted shares   (14)   -    -    -    -    -     -    - 
Vesting of restricted stock units   -         -    -    -    -     -    - 
Shares issued pursuant to exercise of stock options   12    1    71    -    -    -     -    72 
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (15)    -    (15)
Stock based compensation   -    -    1,095    -    -    -     -    1,095 
Balance at June 30, 2021   37,278   $373   $234,165   $(124,375)  $68    $(7,867)   $79   $102,443 
Net loss attributable to common stockholders   -    -    (1,196)   (3,345)   -    -     -    (4,541)
Net loss attributable to non-controlling interest   -    -    -    -    -    -     (4)   (4)
Foreign currency translation adjustment   -    -    -    -    (92)   -     19    (73)
Issuance of restricted shares   34    1    -    -    -          -    1 
Forfeiture of restricted shares   (67)   (1)   -    -    -    -     -    (1)
Stock based compensation   -         928    -    -    -     -    928 
Shares issued pursuant to exercise of stock options   12    -    68    -    -    -     -    68 
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (20)    -    (20)
                                          
Balance at September 30, 2021   37,257   $373   $233,965   $(127,720)  $(24)   $(7,887)   $94   $98,801 

 

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 
  

Nine Months Ended

September 30,

 
   2021   2022 
         
Cash flows from operating activities          
Net loss  $(6,569)  $(5,347)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:          
Non-controlling interest   (5)   3 
Inventory reserve   122    177 
Stock based compensation expense   3,380    3,156 
Depreciation and amortization   6,377    6,152 
Right-of-use assets, non-cash lease expense   1,839    2,071 
Bad debt expense   824    102 
Deferred income taxes   701    107 
Other non-cash items   229    660 
Changes in:          
Accounts receivable   (7,469)   (3,025)
Inventory   (3,689)   (5,544)
Prepaid expenses and other assets   (871)   (761)
Deferred costs   2,888    986 
Deferred revenue   (1,365)   (197)
Accounts payable and accrued expenses   4,130    1,717 
Lease liabilities   (1,757)   (2,034)
Accrued severance payable, net   (12)   63 
           
Net cash provided by (used in) operating activities   (1,247)   (1,714)
           
Cash flows from investing activities:          
Capital expenditures   (2,534)   (4,001)
           
Net cash (used in) investing activities   (2,534)   (4,001)
           
Cash flows from financing activities:          
Net proceeds from stock offering   26,907    - 
Payment of preferred stock dividends   (3,084)   - 
Repayment of long-term debt   (4,040)   (4,279)
Short-term bank debt, net   94    3,949 
Proceeds from exercise of stock options, net   170    - 
Purchase of treasury stock upon vesting of restricted stock   (383)   (193)
           
Net cash provided by (used in) financing activities   19,664    (523)
           
Effect of foreign exchange rate changes on cash and cash equivalents   (189)   (3,510)
Net increase (decrease) in cash, cash equivalents and restricted cash   15,694    (9,748)
Cash, cash equivalents and restricted cash - beginning of period   18,435    26,760 
           
Cash, cash equivalents and restricted cash - end of period  $34,129   $17,012 
           
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   33,821    16,703 
Restricted cash   308    309 
Cash, cash equivalents, and restricted cash, end of period  $34,129   $17,012 
           
Supplemental disclosure of cash flow information:          
Cash paid for:          
Taxes   50    52 
Interest   1,129    945 
           
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

September 30, 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- and nine-month periods ended September 30, 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 September 30, 2022, the consolidated results of its operations for the three- and nine-month periods ended September 30, 2021 and 2022, the consolidated change in stockholders’ equity for the three-month periods ended March 31, June 30, and September 30, 2021 and 2022, and the consolidated cash flows for the nine-month periods ended September 30, 2021 and 2022. The results of operations for the three- and nine-month periods ended September 30, 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 September 30, 2022, the Company had cash (including restricted cash) and cash equivalents of $17,012 and working capital of $36,658. 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 borrowed net $3,949 under the revolving credit facility as of September 30, 2022. See Note 11 for additional information.

 

In June 2012, Pointer entered into a one-year $1,000 revolving credit facility with Discount Bank, which renews annually, subject to the bank’s approval. The proceeds of the revolving credit facility may be used by Pointer for general corporate purposes. The Company did not have any borrowings outstanding under the revolving credit facility with Discount Bank as of September 30, 2022.

 

On October 31, 2022, the Borrowers entered into a third amendment to the Credit Agreement (the “Third Amendment”) with Hapoalim. The Third Amendment provides for, among other things, a new revolving credit facility to Pointer in the aggregate principal amount of $10 million (the “New Revolver”). The New Revolver will be available for a period of one month, commencing on October 31, 2022, and will continue to be available for successive one-month periods until and including October 30, 2023, unless the Borrowers deliver a notice to Hapoalim of their request not to renew the New Revolver.

 

The New Revolver will initially bear interest at the Secured Overnight Financing Rate plus 2.59%. Such interest is subject to monthly changes by Hapoalim, provided that Hapoalim gives Pointer advance notice regarding such change prior to the end of the applicable calendar month.

 

The New Revolver will be secured by a first ranking fixed pledge and assignment by Pointer over its new bank account, which was opened in connection with the New Revolver, and all of the rights relating thereunder as well as a cross guarantee by Powerfleet Israel.

 

Pointer is required to pay a credit allocation fee equal to 0.5% per annum on undrawn and uncancelled amounts of the New Revolver.

 

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 continues to be 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 November 9, 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 capitalized software, realization of deferred tax assets, the impairment of intangible assets including goodwill, and market-based stock compensation costs. Actual results could differ from those estimates.

 

As of September 30, 2022, the impact of COVID-19 continues to unfold. In addition, the Company has experienced increased economic uncertainty due to rising interest rates, higher inflation and supply chain disruptions. 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 September 30, 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- and nine-months ended September 30, 2021 and 2022:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2021   2022   2021   2022 
                 
Products  $10,785   $14,021   $37,671   $43,231 
Services   18,461    20,267    54,114    58,812 
                     
   $29,246   $34,288   $91,785   $102,043 

 

10

 

 

The balances of contract assets, and contract liabilities from contracts with customers are as follows as of December 31, 2021 and September 30, 2022:

 

   December 31, 2021   September 30, 2022 
         (unaudited) 
Assets:          
Deferred contract costs  $3,045   $2,797 
Deferred costs  $2,011   $1,025 
           
Liabilities:          
Deferred revenue- services (1)  $8,401   $9,463 
Deferred revenue - products (1)   2,546    1,268 
           
Deferred revenue   10,947    10,731 
Less: Deferred revenue and contract liabilities - current portion   (6,519)   (6,523)
           
Deferred revenue and contract liabilities - less current portion  $4,428   $4,208 

 

(1) The Company records deferred revenues when cash payments are received or due in advance of the Company’s performance. For the three- and nine-month periods ended September 30, 2021 and 2022, the Company recognized revenue of $2,547 and $7,767, respectively, and $3,174 and $8,040, 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   September 30, 2022 
         (Unaudited) 
Finance receivables, current  $786   $1,117 
Prepaid expenses   4,580    5,227 
Contract assets   1,124    1,146 
Other current assets   2,561    1,378 
           
Prepaid expenses and other current assets  $9,051   $8,868 

 

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 $406 at September 30, 2022.

 

11

 

 

Inventories consist of the following:

 

   December 31, 2021   September 30, 2022 
         (Unaudited) 
Components  $11,137   $13,386 
Work in process   699    586 
Finished goods, net   6,407    9,600 
           
Inventory, net  $18,243   $23,572 

 

NOTE 7 - FIXED ASSETS

 

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

 

   December 31, 2021   September 30, 2022 
         (Unaudited) 
Installed products  $6,190   $7,702 
Computer software   6,732    7,036 
Computer and electronic equipment   5,688    5,507 
Furniture and fixtures   2,246    1,932 
Leasehold improvements   1,445    1,373 
           
Property, plant and equipment, gross   22,301    23,550 
Accumulated depreciation and amortization   (13,313)   (14,556)
Property, plant and equipment, net  $8,988   $8,994 

 

Depreciation and amortization expense of fixed assets for the three- and nine-month periods ended September 30, 2021 was $865 and $2,498, respectively, and for the three- and nine- month periods ended September 30, 2022 was $752 and $2,336, respectively. This includes amortization of costs associated with computer software for the three- and nine-month periods ended September 30, 2021 of $106 and $316, respectively, and for the three- and nine-month periods ended September 30, 2022 of $11 and $145, respectively.

 

12

 

 

NOTE 8 - INTANGIBLE ASSETS AND GOODWILL

 

Costs incurred internally in researching and developing software products are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. The amortization of these costs will be included in cost of revenue over the estimated life of the products.

 

The following table summarizes identifiable intangible assets of the Company as of December 31, 2021 and September 30, 2022:

 

September 30, 2022  Useful Lives
(In Years)
   Gross
Carrying
Amount
   Accumulated Amortization   Net Carrying Amount 
Amortized:                    
Customer relationships   9-12   $19,264   $(5,576)  $13,688 
Trademark and tradename   3-15    7,553    (2,698)   4,855 
Patents   7-11    628    (329)   299 
Technology   7    10,911    (7,612)