Powerfleet, Inc 10-K, filed Mar 16, 2022
Powerfleet, Inc. (AIOT)
About this 10-K
Powerfleet, Inc filed this 10-K on March 16, 2022, covering the fiscal year ended December 31, 2021.
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $126.21M
- up 11.1% from $113.59M a year earlier
- Net loss
- $13.29M
- compared with a net loss of $9.01M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For
the fiscal year ended | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from _______ to _______. |
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
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The number of shares of the registrant’s Common Stock outstanding as of March 10, 2022, was shares.
DOCUMENTS INCORPORATED BY REFERENCE
| Document | Part of Form 10-K | |
| Part III |
POWERFLEET, INC.
TABLE OF CONTENTS
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PART I
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K of PowerFleet, Inc. contains “forward-looking statements” (within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which may include information concerning our beliefs, plans, objectives, goals, expectations, strategies, anticipations, assumptions, estimates, intentions, future events, future revenues or performance, capital expenditures and other information that is not historical information. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Many of these statements appear, in particular, under the headings “Business,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. When used in this report, the words “seek,” “estimate,” “expect,” “anticipate,” “project,” “plan,” “contemplate,” “plan,” “continue,” “intend,” “believe” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but there can be no assurance that we will realize our expectations or that our beliefs will prove to be correct.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements herein include, but are not limited, to:
| ● | future economic and business conditions; | |
| ● | the loss of any of our key customers or reduction in the purchase of our products by any such customers; | |
| ● | the failure of the markets for our products to continue to develop; | |
| ● | our inability to adequately protect our intellectual property; | |
| ● | our inability to manage growth; | |
| ● | the effects of competition from a wide variety of local, regional, national and other providers of wireless solutions; | |
| ● | changes in laws and regulations or changes in generally accepted accounting policies, rules and practices; | |
| ● | changes in technology or products, which may be more difficult or costly, or less effective, than anticipated; and | |
| ● | those risks and uncertainties set forth under the heading “Risk Factors” in Item 1A of this report. |
There may be other factors of which we are currently unaware or which we currently deem immaterial that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date they are made and are expressly qualified in their entirety by the cautionary statements included in this report. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances occurring after the date they were made or to reflect the occurrence of unanticipated events, or otherwise.
Note Regarding Trademarks
We have, or have applied for, U.S. and/or foreign trademark protection for I.D. SYSTEMS® and Design, the I.D. SYSTEMS Logo®, VEHICLE ASSET COMMUNICATOR®, POWERFLEET®, POWERFLEET VISION®, POWERFLEET IQ®, POWERFLEET YARD®, VERIWISE IQ®, ASSET INTELLIGENCE®, didBOX®, FREIGHTCAM, KEYTROLLER®, REEFERMATE®, POINTER® and Design, and CELLOCATOR® and Design.
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Item 1. Business.
Overview
PowerFleet, Inc. (together with its subsidiaries, “PowerFleet,” the “Company,” “we,” “our” or “us”) is a global leader of Internet-of-Things (IoT) solutions providing valuable business intelligence for managing high-value enterprise assets that improve operational efficiencies.
We are headquartered in Woodcliff Lake, New Jersey, with offices located around the globe.
Our patented technologies are a proven solution for organizations that must monitor and analyze their assets to improve safety, increase efficiency, reduce costs, and drive profitability. Our offerings are sold under the global brands PowerFleet, Pointer, and Cellocator.
We have an established history of IoT device development and innovation creating devices that can withstand harsh and rugged environments. With 54 patents and patent applications and 25 years’ experience, we believe we are well positioned to evolve our offerings for even greater value to customers through our cloud-based applications for unified operations.
We deliver advanced data solutions that connect mobile assets to increase visibility, operational efficiency and profitability. Across our spectrum of vertical markets, we differentiate ourselves by developing mobility platforms that collect data from unique sensors. Further, because we are original equipment manufacturer (OEM) agnostic, we help organizations view and manage their mixed assets homogeneously. All of our solutions are paired with software as a service (SaaS) and analytics platforms to provide an even deeper level of insights and understanding of how assets are utilized and how drivers and operators operate those assets. These insights include a full set of Key Performance Indicators (KPIs) to drive operational and strategic decisions. Our customers typically get a return on their investment in less than 12 months from deployment.
Our enterprise software applications have machine learning capabilities and are built to integrate with our customers’ management systems to provide a single, integrated view of asset and operator activity across multiple locations while providing real-time enterprise-wide benchmarks and peer-industry comparisons. We look for analytics, as well as the data contained therein, to differentiate us from our competitors, adding significant value to customers business operations, and helping to contribute to their bottom line. Our solutions also feature open application programming interfaces (APIs) for additional integrations and development to boost other enterprise management systems and third-party applications.
We market and sell our connected IoT data solutions to a wide range of customers in the commercial and government sectors. Our customers operate in diverse markets, such as manufacturing, automotive manufacturing, wholesale and retail, food and grocery distribution, pharmaceutical and medical distribution, construction, mining, utilities, aerospace, vehicle rental, as well as logistics, shipping, transportation, and field services. Traditionally, these businesses have relied on manual, often paper-based, processes or on-premise legacy software to operate their high-value assets, manage workforce resources, and distributed sites; and face environmental, safety, and other regulatory requirements. In today’s landscape, it is crucial for these businesses to invest in solutions that enable easy analysis and sharing of real-time information.
Our Solutions
We provide critical actionable information that powers unified operations throughout organizations. We are solving the challenge of inefficient data collection, real-time visibility, and analysis that leads to transformative business operations. Our SaaS cloud-based applications take data from our IoT devices and ecosystem of third-party and partner applications to present actionable information for customers to increase efficiencies, improve safety and security, and increase their profitability in easy-to-understand reports, dashboards, and real-time alerts.
Key Applications of our IoT Solutions:
The Company provides real-time intelligence for organizations with high-value assets allowing them to make informed decisions and ultimately improve their operations, safety, and bottom line. Our applications enable organizations to capture IoT data from various types of assets with devices and sensors creating a holistic view for analysis and action.
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The core applications our IoT solutions address include:
End-to-end Visibility: Organizations with expensive assets such as vehicles, machinery, or equipment need to keep track of where the assets are located, monitor for misuse, and understand how and when assets are being used. By having complete visibility of their assets, customers can improve security, utilization and customer service. In addition, our visibility solutions help with personnel workflows and resource management, freight visibility through load status, equipment availability status, dwell and idle time, geofencing, two-way temperature control and management, multizone temperature monitoring, arrival and departure times, and supply chain allocation.
Regulatory Compliance: Businesses must comply with government regulations and provide proof of compliance, which is commonly an onerous process to enforce and maintain. Our solutions provide critical data points and reports to help customers stay within compliance, avoid fines for non-compliance, and automate the reporting process. We deliver real-time position reports, hours-of-service, temperature monitoring and control, electronic safety checklists, workflow management, controlling vehicle access to only authorized operators, inspection reports, and history logs of use.
Improve Safety: Our applications are designed to provide asset and operator management, monitoring, and visibility for safer environments. Our solutions allow our customers to monitor their fleet of vehicles on various parameters, including but not limited to, vehicle location, speed, engine fault codes, driver behavior, eco-driving, and ancillary sensors and can receive reports and alerts, either automatically or upon request wirelessly via the internet, email, mobile phone or an SMS. In addition, our dash camera provides critical video capture that can be used to help exonerate drivers when in accidents or help bolster training and coaching programs of employees. We also offers preventative solutions such as safety warning products to alert vehicle operators of objects or pedestrians in their pathway to prevent accidents, injuries, and damage. Our analytics platform features dashboards with KPIs and can help manager identify patterns, trends and outliers that can be used as flags for interventions.
Drive Operational Efficiency & Productivity: To increase utilization of mobile assets, our solutions enable the identification of a change in status, real-time location, geo-fencing alerts when an asset is approaching or leaving its destination, cargo status, and on-board intelligence utilizing a motion sensor and proprietary logic that identifies the beginning of a drive and the end of a drive. Having this information enables customers to increase capacity, speed of service, right-size their fleets, and improve communication internally and with customers. In addition, customers can reduce revenue per mile, reduce claims and claims processing times, and reduce the number of assets needed. This is achieved through proving such things as two-way integrated workflows for drivers, control assignments and work change, Electronic Driver Logging (ELD) and automated record keeping for regulatory compliance, monitoring of asset pools and geofence violations, and various reporting insights that flag under-utilized assets, the closest assets, and alerts on dwell time and exceeding the allotted time for loading and unloading.
We help customers to automate processes and increase productivity of their employees. Our applications enable customers to determine where operators are assigned and can temporarily reassign them based on peak needs, evaluate any disparity in the amount employees are paid compared to the time they actually spend operating a vehicle. Our applications help answer the question of why does it take some employees longer than others to do specific tasks, where to focus labor resources, and how to forecast vehicles and operators needed for future workflow.
In addition, for our rental car vertical, our applications automatically upload vehicle identification number, mileage and fuel data as a vehicle enters and exits the rental lot, which can significantly expedite the rental and return processes for travelers, and provide the rental company with more timely inventory status, more accurate billing data that can generate higher fuel-related revenue, and an opportunity to utilize customer service personnel for more productive activities, such as inspecting vehicles for damage and helping customers with luggage.
Our solution for “car sharing” permits a rental car company to remotely control, track and monitor their rental vehicles wherever they are parked. Whether for traditional “pod-based” rental or for the emerging rent-anywhere model, the system, through APIs integrated into any rental company’s fleet management system, (i) manages member reservations by smart phone or Internet, and (ii) charges members for vehicle use by the hour.
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For our customers with a variety of make-model-years in their fleet, we have developed an unmatched library of certified vehicle code interfaces through our second-generation On-Board Diagnostics (“OBD-II”), industry standard. Our patented fleet management system helps fleet owners improve asset utilization, reduce capital costs, and cut operating expenses, such as vehicle maintenance or service and support.
Increase Security: Our solutions allow our customers to reduce theft and improve inventory management. Customers can lockdown their assets with automated e-mail or text message alerts, emergency tracking of assets (higher frequency of reports) if theft is expected, geo-fencing alerts when an asset enters a prohibited geography or location, and near real-time sensors that alert based on changes in temperature and shock, among other things. We also provide stolen vehicle retrieval (“SVR”) services. Most of the SVR products used to provide our SVR services are mainly sold to (i) local car dealers and importers that in turn sell the products equipped in the vehicle to the end users who purchase the SVR services directly from us, or (ii) leasing companies which purchase our SVR services in order to secure their own vehicles.
Reduce Costs
We enable our customers to improve asset utilization, reduce capital costs, and cut operating expenses, such as vehicle maintenance or service and support. Our solutions provide engine performance, machine diagnostics, fuel consumption, and battery life to improve preventative maintenance scheduling, increase uptime, and gain a longer service life of equipment. Through our software applications, customers can optimize capacity, analyze resource allocation, and improve utilization of assets to reduce capital expenses such as purchasing new or leasing additional equipment. Our applications provide root cause analysis for any cargo claims and helps with exoneration of drivers in accidents via dash camera visibility.
Analytics and Machine Learning
Our analytics platforms provide our customers with a holistic view of their asset activity across their enterprise. For example, our image machine learning system allows us to process images from our freight camera and other sources and identify key aspects of operations and geospatial information such as location, work being accomplished, type of cargo, how cargo is loaded and if there are any visible issues such as damage.
Key Performance Indicators & Benchmarks
Our cloud-based software applications provide a single, integrated view of asset activity across multiple locations, generating enterprise-wide benchmarks, peer-industry comparisons, and deeper insights into asset operations. In addition, our customers can set real-time alerts for exception-based reporting or critical activity that needs immediate attention. This enables management teams to make more informed, effective decisions, raise asset performance standards, increase productivity, reduce costs, and enhance safety.
Specifically, our analytics platforms allow users to quantify best-practice enterprise benchmarks for asset utilization and safety, reveal variations and inefficiencies in asset activity across both sites and geographic regions, or identify opportunities to eliminate or reallocate assets, to reduce capital and operating costs. We provide an extensive set of decision-making tools and a variety of standard and customized reports to help businesses improve overall operations.
We look for analytics and machine learning to make a growing contribution to drive platform and SaaS revenue, further differentiate our offerings and add value to our solutions. We also use our analytics platform for our own internal platform quality control.
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Services
Hosting Services. We provide the use of our systems as a remotely hosted service, with the system server and application software residing in our colocation center or on a cloud platform provider’s infrastructure (e.g., Azure, AWS). This approach helps us reduce support costs and improve quality control. It separates the system from the restrictions of the customers’ local IT networks, which helps reduce their system support efforts and makes it easier for them to receive the benefits of system enhancements and upgrades. Our hosting services are typically offered with extended maintenance and support services over a multi-year term of service, with automatic renewals following the end of the initial term.
Software as a Service. We provide system monitoring, help desk technical support, escalation procedure development, routine diagnostic data analysis and software updates services as part of the ongoing contract term. These services ensure deployed systems remain in optimal performance condition throughout the contract term and provide access to newly developed features and functions on an annual basis.
Maintenance Services. We provide a warranty on the hardware components of our system. During the warranty period, we either replace or repair defective hardware. We also make extended maintenance contracts available to customers and offer ongoing maintenance and support on a time and materials basis.
Customer Support and Consulting Services for Ease of Use, Adoption, and Added Value. We have developed a framework for the various phases of system training and support that offer our customers both structure and flexibility. Major training phases include hardware installation and troubleshooting, software installation and troubleshooting, “train-the-trainer” training on asset hardware operation, preliminary software user training, system administrator training, information technology issue training, ad hoc training during system launch and advanced software user training.
Increasingly, training services are provided through scalable online interactive training tools. Support and consulting services are priced based on the extent of training that the customer requests. To help our customers derive the most benefit from our system, we supply a broad range of documentation and support including videos, interactive online tools, hardware user guides, software manuals, vehicle installation overviews, troubleshooting guides, and issue escalation procedures.
We provide our consulting services both as a stand-alone service to study the potential benefits of implementing a IoT business intelligence solution and as part of the system implementation itself. In some instances, customers prepay us for extended maintenance, support and consulting services. In those instances, the payment amount is recorded as deferred revenue and revenue is recognized over the service period.
Growth Strategy
Our objective is to become a leading global provider of IoT SaaS solutions for high-value enterprise assets to drive optimized operations and create safer environments. To achieve this goal, we intend to prove value, retain, and grow business with existing customers and pursue opportunities with new customers by:
| ● | focusing our business solutions by vertical markets and go to market strategies to each market; | |
| ● | positioning ourselves as an innovative thought leader; | |
| ● | maintaining a world class sales and marketing team; | |
| ● | identifying, seizing, and managing revenue opportunities; | |
| ● | expanding our customer base, achieving wider market penetration and educating customers with mixed assets in their organization about our other applications; | |
| ● | implementing improved marketing, sales and support strategies; | |
| ● | shortening our initial sales cycles by helping our customers through: |
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| ○ | identifying and quantifying benefits expected from our solutions; | |
| ○ | accelerating transitions from implementation to roll-out; and | |
| ○ | building service revenue through long-term SaaS contracts; |
| ● | differentiating our product offering through analytics, machine learning, unique sensors, and value-added services; | |
| ● | producing incremental revenue at a high profit margin; and | |
| ● | expanding our partnerships and integrations. |
We also plan to expand into new applications and markets by:
| ● | pursuing opportunities to integrate our system with computer hardware and software vendors, including: |
| ○ | OEMs; | |
| ○ | transportation management systems; | |
| ○ | warehouse management systems; | |
| ○ | labor and timecard systems; | |
| ○ | enterprise resource planning; and | |
| ○ | yard management systems. |
| ● | establishing relationships with global distributors; and | |
| ● | evaluating and pursuing strategically sound acquisitions of companies. |
Sales and Marketing
Our sales and marketing objectives are to achieve broad market awareness and penetration, with an emphasis both on expanding business opportunities with existing customers and on securing new customers.
We market our systems directly to commercial and government organizations and through indirect sales channels, such as OEMs, vehicle importers, distributors, and industrial equipment dealers.
In addition, we are actively pursuing strategic relationships with key companies in our target markets - including complementary hardware and software vendors and service providers - to further penetrate these markets by embedding our products in the assets our systems monitor and integrating our solutions with other systems.
We sell our systems to corporate-level executives, division heads and site-level management within the enterprise. Typically, our initial system deployment serves as a basis for potential expansion across the customer’s organization.
We work closely with customers to prove out a return on investment which is usually less than 12 months, and help maximize the utilization and benefits of our system and demonstrate the value of enterprise-wide deployments. Post-implementation, we consult with our customers to further extend and customize the benefits to the enterprise by delivering enhanced analytics capabilities.
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Customers
We market and sell our wireless solutions to a wide range of customers in the commercial and government sectors. Our customers operate in diverse markets, such as automotive manufacturing, retail, food and grocery distribution, logistics, shipping, freight transportation, heavy industry, wholesale distribution, manufacturing, aerospace and vehicle rental.
We enter into master agreements with our customers in the normal course of business. These agreements define the terms of any sales of products and/or services by us to the applicable customer, including, but not limited to, terms regarding payment, support services, termination and assignment rights. These agreements generally obligate us only when products or services are actually sold to the customer thereunder.
We strive to establish long-term relationships with our customers in order to maximize opportunities for new application development and increased sales. Some of our global customers that benefit from the Company’s combined solutions to power their specific IoT and machine to machine mobility needs include Avis, Junghenrich, Walmart, Toyota, and XPO Logistics. No individual customer generates revenue equal to or greater than 10% of the Company’s consolidated total revenue.
Competition
The market for our solutions is rapidly evolving, highly competitive and fragmented. Our target markets are also subject to quickly changing product technologies, shifting customer needs, regulatory requirements and frequent introductions of new products and services.
In each of our global markets, we encounter different competitors due to the dynamics of each market. A significant number of companies have developed or are developing and marketing software and hardware for wireless products that currently compete or will compete directly with our solutions. We compete with organizations varying in size, including many small, start-up companies as well as large, well-capitalized organizations.
While some of our competitors focus exclusively on providing wireless asset management solutions, many are involved in wireless technology as an extension of a broader business. Many of our larger competitors are able to dedicate extensive financial resources to the research and development and deployment of wireless solutions. As government and commercial entities expand the use of wireless technologies, we expect that competition will continue to increase within our target markets.
Research and Development
Our research and development team has expertise in areas such as hardware, software and firmware development and testing, database design and data analytics, wireless communications, artificial intelligence methods, mechanical and electrical engineering, and both product and project management. In addition, we utilize external contractors to supplement our team in the areas of software and firmware development, digital design, test development and product-level testing.
Generally, our research and development efforts are focused on expanding the capabilities of our products, differentiating our offerings, simplifying the implementation, support and utilization of our solutions, reducing the cost of our solutions, increasing the reliability of our solutions, expanding the functionality of our solutions to meet customer and market requirements, applying new advances in technology to enhance existing solutions, and building further competitive advantages through our intellectual property portfolio.
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Intellectual Property
Patents
We attempt to protect our technology and products through a variety of intellectual property protections, including the pursuit of patent protection in the United States and certain foreign jurisdictions. Because of the differences in patent laws and laws concerning proprietary rights, the extent of protection provided by U.S. patents or proprietary rights owned by us may differ from that of their foreign counterparts. Where strategically appropriate, we will attempt to pursue suspected violators of our patents and, whenever possible, monetize our intellectual property.
We built a portfolio of patents and patent applications relating to various aspects of our technology products and solutions. As of February 25, 2022, our patent portfolio includes 42 U.S. patents, 4 pending U.S. patent applications, 2 pending foreign international applications, and 6 foreign patents. With the timely payment of all maintenance fees, the U.S. patents have expiration dates falling between 2023 and 2039. No single patent or patent family is considered material to our business.
Trademarks
We have, or have applied for, U.S. and/or foreign trademark protection for I.D. SYSTEMS® and Design, the I.D. SYSTEMS Logo®, VEHICLE ASSET COMMUNICATOR®, POWERFLEET®, POWERFLEET VISION®, POWERFLEET IQ®, POWERFLEET YARD®, VERIWISE IQ®, ASSET INTELLIGENCE®, didBOX®, FREIGHTCAM, KEYTROLLER®, REEFERMATE®, POINTER® and Design, and CELLOCATOR® and Design.
We attempt to avoid infringing known proprietary rights of third parties in our product development and sales efforts. However, it is difficult to proceed with certainty in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential at the time of the application filing, with regard to similar technologies. If we were to discover that our products violate third-party proprietary rights, we may not be able to:
| ● | obtain licenses to continue offering such products without substantial reengineering; | |
| ● | re-engineer our products successfully to avoid infringement; | |
| ● | obtain licenses on commercially reasonable terms, if at all; | |
| ● | litigate an alleged infringement successfully; or | |
| ● | settle without substantial expense and damage awards. |
Any claims against us relating to the infringement of third-party proprietary rights, even if without merit, could result in the expenditure of significant financial and managerial resources or in injunctions preventing us from distributing certain products. Such claims could materially adversely affect our business, financial condition and results of operations.
Our software products are susceptible to unauthorized copying and uses that may go undetected, and policing such unauthorized use is difficult. In general, our efforts to protect our intellectual property rights through patent, copyright, trademark and trade secret laws and contractual safeguards may not be effective to prevent misappropriation of our technology, or to prevent the development and design by others of products or technologies similar to, or competitive with, those developed by us. Our failure or inability to protect our proprietary rights could materially and adversely affect our business, financial condition and results of operations.
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Manufacturing
We outsource our hardware manufacturing operations to contract manufacturers. This strategy enables us to focus on our core competencies - designing hardware and software systems and delivering solutions to customers - and avoid investing in capital-intensive electronics manufacturing infrastructure. Outsourcing also provides us with the ability to ramp up deliveries to meet increases in demand without increasing fixed expenses.
Our manufacturers are responsible for obtaining the necessary components and supplies to manufacture our products. While components and supplies are generally available from a variety of sources, manufacturers generally depend on a limited number of suppliers. In the past, unexpected demand for communication products has caused worldwide shortages of certain electronic parts and allocation of such parts by suppliers that had an adverse impact on the ability of manufacturers to deliver products as well as on the cost of producing such products.
Due to the general availability of manufacturers for our products, we do not believe that the loss of any of our manufacturers would have a long-term material adverse effect on our business, although there could be a short-term adverse effect on our business.
We generally attempt to maintain sufficient inventory to meet customer demand for products, as well as to meet anticipated sales levels. If our product mix changes in unanticipated ways, or if sales for particular products do not materialize as anticipated, we may have excess inventory or inventory that becomes obsolete. In such cases, our operating results could be negatively affected.
Government Regulations
The use of radio emissions is subject to regulation in the United States by various federal agencies, including the Federal Communications Commission (the “FCC”), and the Occupational Safety and Health Administration (“OSHA”). Various state agencies also have promulgated regulations which concern the use of lasers and radio/electromagnetic emissions standards.
Regulatory changes in the United States and other countries in which we may operate in the future could require modifications to some of our products in order for us to continue manufacturing and marketing our products in those areas.
Our products intentionally transmit radio signals, including narrow band and spread spectrum signals, as part of their normal operation. We have obtained certification from the FCC for our products that require certification. Users of these products in the United States do not require any license from the FCC to use or operate our products. To market and sell our integrated wireless solutions in the European Union, we also utilize unlicensed radio spectra, and have obtained the required European Norm (“EN”) certifications.
In addition, some of our operations use substances regulated under various federal, state and local laws governing the environment and worker health and safety, including those governing the discharge of pollutants into the ground, air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Certain of our products are subject to various federal, state and local laws governing chemical substances in electronic products.
The adoption of unfavorable regulations, or unfavorable interpretations of existing regulations by courts or regulatory bodies, could require us to incur significant compliance costs, cause the development of the affected markets to become impractical or otherwise adversely affect our ability to produce or market our products.
Since 1996, our subsidiary Pointer Telocation Ltd. (“Pointer”) has held an operational license, which is renewed on a regular basis, from the Ministry of Communications in Israel to operate our wireless messaging system over 2 MHz in the 966 to 968 MHz radio spectrum band. It also obtains licenses from the Israeli Ministry of Communications in order to manufacture, import, market and sell its products in Israel.
Our subsidiary Pointer Argentina S.A. (“Pointer Argentina”) obtains domestic licenses for the deployment of our SVR operation in Argentina and local operators are required to obtain a specific license for their operations.
We are currently registered by the Federal Department of Security (“SEGOB”) in Mexico to provide our services.
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Our subsidiary Pointer SA (PTY) Ltd. (“Pointer South Africa”) is currently registered as a security service provider under the Private Security Industry Regulation Act, 2001 in South Africa. Our products are also listed with the (Independent Communications Authority of South Africa).
While the use of our cellular monitoring units does not require regulatory approvals, in Israel, the use of our radio frequency products is subject to regulatory approvals from government agencies. In general, applications for regulatory approvals to date have not been problematic. This being said, we cannot guarantee that approvals already obtained are or will remain sufficient in the view of regulatory authorities indefinitely.
Employees
As of March 1, 2022, we had 669 total employees across the globe, all of whom are full-time employees. We believe that our relationships with our employees is good.
Other Information
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 pursuant to which we acquired Pointer (the “Transactions”). Upon the closing of the Transactions, PowerFleet became the parent entity of I.D. Systems and Pointer.
Our primary website is www.powerfleet.com. We make available on this website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such information to, the Securities and Exchange Commission (“SEC”). Reports and other information we file with the SEC may also be viewed at the SEC’s website at www.sec.gov. We also make available on this website, free of charge, our Code of Ethics for Senior Financial Officers, which applies to our principal executive officer, principal financial officer and principal accounting officer.
Item 1A. Risk Factors.
In addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating the Company’s business. Our business, financial condition or results of operations could be materially and adversely affected by any of these risks. Additional risks not presently known to the Company or that the Company currently deems immaterial may also adversely affect our business, financial condition or results of operations.
Risk Factor Summary:
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this summary. These risks include, among others, the following:
| ● | We may not realize the anticipated benefits and cost savings of the Transactions. | |
| ● | Integrating I.D. Systems’ and Pointer’s businesses may be more difficult, time-consuming or costly than expected. | |
| ● | We have incurred significant losses and have a substantial accumulated deficit. If we cannot achieve profitability, the market price of our common stock could decline significantly. | |
| ● | The inability of our supply chain to deliver certain key components, such as semiconductors, could materially adversely affect our business, financial condition and results of operations. | |
| ● | Our expansion into new products, services, and technologies subjects us to additional risks. | |
| ● | If we are unable to keep up with rapid technological change, we may be unable to meet the needs of our customers, which could materially and adversely affect our financial condition and results of operations and reduce our ability to grow our market share. | |
| ● | We may be subject to breaches of our information technology systems, which could damage our reputation, vendor, and customer relationships, and our customers’ access to our services. | |
| ● | The industry in which we operate is highly competitive, and competitive pressures from existing and new companies could have a material adverse effect on our financial condition and results of operations. | |
| ● | We may not be able to successfully execute our strategic initiatives or meet our long-term financial goals. | |
| ● | We are an international company and may be susceptible to a number of political, economic and geographic risks that could harm our business. | |
| ● | Conditions and changes in the global economic environment may adversely affect our business and financial results. | |
| ● | The international scope of our business exposes us to risks associated with foreign exchange rates. | |
| ● | We expect that the impact of COVID-19 will continue to adversely affect our business, results of operations and financial condition. | |
| ● | We may need to obtain additional capital to fund our operations that could have negative consequences on our business. | |
| ● | If the market for our technology does not develop or become sustainable, expands more slowly than we expect or becomes saturated, our revenues will decline and our financial condition and results of operations could be materially and adversely affected. |
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| ● | We may incur additional charges for excess and obsolete inventory, which could adversely affect our cost of sales and gross profit. | |
| ● | The long and variable sales cycles for our solutions may cause our revenues and operating results to vary significantly from quarter to quarter or year to year. | |
| ● | We rely significantly on channel partners to sell our products, and disruptions to, or our failure to develop and manage our channel partners would harm our business. | |
| ● | If we are unable to protect our intellectual property rights, our financial condition and results of operations could be materially and adversely affected. | |
| ● | We may become involved in an intellectual property dispute that could subject us to significant liability and divert the time and attention of our management and prevent us from selling our products. | |
| ● | We rely on subcontractors to manufacture and deliver our products. | |
| ● | Our manufacturers rely on a limited number of suppliers for several significant components used in our products. | |
| ● | The federal government or independent standards organizations may implement significant regulations or standards that could adversely affect our ability to produce or market our products. | |
| ● | Because our products are complex, they may have undetected errors or failures when they are introduced, which could seriously harm our business, and our product liability insurance may not adequately protect us. | |
| ● | Changes in practices of insurance companies in the markets in which we provide and sell our SVR services and products could adversely affect our revenues and growth potential. | |
| ● | A decline in sales of consumer or commercial vehicles in the markets in which we operate could result in reduced demand for our products and services. | |
| ● | A reduction in vehicle theft rates may adversely impact demand for our SVR services and products. | |
| ● | The increasing availability of handheld GPRS devices may reduce the demand for our products for small fleet management. | |
| ● | The use of our products is subject to international regulations. | |
| ● | The adoption of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or products and could harm our results of operations. | |
| ● | Our financial statements may not reflect certain payments we may be required to make to employees. | |
| ● | Some of our employees in our subsidiaries are members of labor unions and a dispute between us and any such labor union could result in a labor strike that could delay or preclude altogether our ability to generate revenues in the markets where such employees are located. | |
| ● | Under the current laws in jurisdictions in which we operate, we may not be able to enforce non-compete covenants and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees. | |
| ● | Manufacturing of many of our products is highly complex, and an interruption by suppliers, subcontractors or vendors could adversely affect our business, financial condition or results of operations. | |
| ● | Our Israeli subsidiaries have incurred significant indebtedness to finance the Transactions. | |
| ● | The terms of the Credit Agreement restrict PowerFleet Israel’s and Pointer’s current and future operations, particularly their ability to respond to changes or to take certain actions. | |
| ● | If we lose our executive officers, or are unable to recruit additional personnel, our ability to manage our business could be materially and adversely affected. | |
| ● | We provide no assurance that we will be able to successfully integrate any businesses, products, technologies or personnel that we have acquired or might acquire in the future. | |
| ● | The unpredictability of our quarterly operating results could adversely affect the market price of our common stock. | |
| ● | We provide financing to our customers for the purchase of our products, which may increase our credit risks in the event of a deterioration in a customer’s financial condition or in global credit conditions. | |
| ● | Interest rate fluctuations may adversely affect our income and results of operations. | |
| ● | Our cash and cash equivalents could be adversely affected by a downturn in the financial and credit markets. | |
| ● | Goodwill impairment or intangible impairment charges may affect our results of operations in the future. | |
| ● | In connection with the preparation of our annual financial statements for the fiscal year ended December 31, 2021, we identified a material weakness in our internal control over financial reporting. Any failure to maintain effective internal control over financial reporting could harm us. | |
| ● | Holders of our Series A Preferred Stock can exercise significant control over the Company, which could limit the ability of our stockholders to influence the outcome of key transactions, including a change of control. | |
| ● | The Series A Preferred Stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of holders of our common stock, which could adversely affect our liquidity and financial condition, and may result in the interests of the holders of Series A Preferred Stock differing from those of the holders of our common stock. | |
| ● | Any issuance of our common stock upon conversion of the Series A Preferred Stock will cause dilution to then existing Company stockholders and may depress the market price of our common stock. | |
| ● | The concentration of common stock ownership among our executive officers and directors could limit the ability of other stockholders of the Company to influence the outcome of corporate transactions or other matters submitted for stockholder approval. | |
| ● | Future sales of our common stock, including sales of our common stock acquired upon the exercise of outstanding options, may cause the market price of our common stock to decline. | |
| ● | The issuance of equity or debt securities under our shelf registration statement could have a negative impact on the price of our common stock. | |
| ● | Our Charter provides that the Court of Chancery of the State of Delaware will be the exclusive forum for certain legal actions between us and our stockholders, which could limit stockholders’ ability to obtain a judicial forum viewed by the stockholders as more favorable for disputes with us or our directors, officers or employees, and the enforceability of the exclusive forum provision may be subject to uncertainty. | |
| ● | The Charter contains a provision renouncing our interest and expectancy in certain corporate opportunities which may prevent us from receiving the benefit of certain corporate opportunities. | |
| ● | Provisions of Delaware law or the Charter could delay or prevent an acquisition of the Company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for stockholders to change our management. |
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Risks Related to the Transactions:
We may not realize the anticipated benefits and cost savings of the Transactions.
The success of the Transactions will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining I.D. Systems’ and Pointer’s businesses. Our ability to realize these anticipated benefits and cost savings is subject to certain risks, including, among others:
| ● | our ability to successfully combine I.D. Systems’ and Pointer’s businesses; | |
| ● | the risk that the combined businesses will not perform as expected; |
| ● | the extent to which we will be able to realize the expected synergies, which include realizing potential savings from re-assessing priority assets and aligning investments, eliminating duplication and redundancy, adopting an optimized operating model between both companies and leveraging scale, and creating value resulting from the combination of I.D. Systems’ and Pointer’s businesses; | |
| ● | the possibility that the aggregate consideration being paid for Pointer is greater than the value we will derive from the Transactions; | |
| ● | the possibility that the combined company will not achieve the free cash flow that we have projected; | |
| ● | the reduction of cash available for operations and other uses and the incurrence of indebtedness to finance the Transactions; | |
| ● | the assumption of known and unknown liabilities of Pointer, including potential tax and employee-related liabilities; and | |
| ● | the possibility of costly litigation challenging the Transactions. |
If I.D. Systems and Pointer are not able to successfully integrate their businesses within the anticipated time frame, or at all, the anticipated cost savings, synergies operational efficiencies and other benefits of the Transactions may not be realized fully or may take longer to realize than expected, and the combined company may not perform as expected.
Integrating I.D. Systems’ and Pointer’s businesses may be more difficult, time-consuming or costly than expected.
Prior to completion of the Transactions, I.D. Systems and Pointer operated independently, and there can be no assurances that their businesses can be integrated successfully. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s or both companies’ ongoing businesses or unexpected integration issues, such as higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. Specifically, issues that must be addressed in integrating the operations of I.D. Systems and Pointer in order to realize the anticipated benefits of the Transactions, so the combined business performs as expected include, among others:
| ● | combining the companies’ separate operational, financial, reporting and corporate functions; | |
| ● | integrating the companies’ technologies, products and services; | |
| ● | identifying and eliminating redundant and underperforming operations and assets; | |
| ● | harmonizing the companies’ operating practices, employee development, compensation and benefit programs, internal controls and other policies, procedures and processes; | |
| ● | addressing possible differences in corporate cultures and management philosophies; | |
| ● | maintaining employee morale and retaining key management and other employees; | |
| ● | attracting and recruiting prospective employees; | |
| ● | consolidating the companies’ corporate, administrative and information technology infrastructure; | |
| ● | coordinating sales, distribution and marketing efforts; | |
| ● | managing the movement of certain businesses and positions to different locations; | |
| ● | maintaining existing agreements with customers and vendors and avoiding delays in entering into new agreements with prospective customers and vendors; | |
| ● | coordinating geographically dispersed organizations; and | |
| ● | effecting potential actions that may be required in connection with obtaining regulatory approvals. |
In addition, at times, the attention of certain members of our management and our resources may be focused on the integration of the businesses of the two companies and diverted from day-to-day business operations, which may disrupt our business.
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Risks Related to Our Business:
We have incurred significant losses and have a substantial accumulated deficit. If we cannot achieve profitability, the market price of our common stock could decline significantly.
As of December 31, 2021, we had cash (including restricted cash,) and cash equivalents of $26.8 million and working capital of $43.6 million. Our primary sources of cash are cash flows from operating activities, our holdings of cash, cash equivalents and investments from the sale of our capital stock and borrowings under our credit facility. To date, we have not generated sufficient cash flow solely from operating activities to fund our operations.
We incurred net losses of approximately $12 million, $13.6 million, and $18.1 million for the years ended December 31, 2019, 2020 and 2021, respectively, and have incurred additional net losses since inception. At December 31, 2021, we had an accumulated deficit of approximately $134.4 million. Our ability to increase our revenues from the sale of our solutions will depend on our ability to successfully implement our growth strategy and the continued expansion of our markets. If our revenues do not grow or if our operating expenses continue to increase, we may not be able to become profitable and the market price of our common stock could decline.
The inability of our supply chain to deliver certain key components, such as semiconductors, could materially adversely affect our business, financial condition and results of operations.
Our products contain a significant number of components that we source globally. If our supply chain fails to deliver products to us in sufficient quality and quantity on a timely basis, we will be challenged to meet our customer order delivery timelines and could incur significant additional expenses for expedited freight and other related costs. Similarly, many of our customers are dependent on an ever-greater number of global suppliers to manufacture their products. These global supply chains have been, and may continue to be, adversely impacted by events outside of our control, including macroeconomic events, trade restrictions, economic recessions or natural occurrences, such as the ongoing disruptions from the COVID-19 pandemic. As a result of COVID-19, we have experienced delays in supply chain deliveries, extended lead times and shortages of key components, some raw material cost increases and slowdowns at certain production facilities. These disruptions have delayed and may continue to delay the timing of some orders and expected deliveries of our products. If the impact of the supply chain disruptions are more severe than we expect, it could result in longer lead times, inventory supply challenges and further increased costs, all of which could materially adversely affect our business, financial condition and results of operations.
Many of the products we supply are reliant on semiconductors. Globally, there is an ongoing significant shortage of semiconductors. The semiconductor supply chain is complex, with capacity constraints occurring throughout. We have and will continue to work closely with our suppliers and customers to minimize any potential adverse impacts of the global semiconductor chip shortage and monitor the availability of semiconductor chips and other key components, customer production schedules and any other supply chain inefficiencies that may arise. However, if we are not able to mitigate the impact of the semiconductor chip shortage semiconductor shortage impact, any direct or indirect supply chain disruptions may have a material adverse impact on our business, financial condition and results of operations.
Our expansion into new products, services, and technologies, subjects us to additional risks.
We may have limited or no experience in our newer market segments, and our customers may not adopt our product or service offerings. These offerings, which can present new and difficult technology challenges, may subject us to claims if customers of these offerings experience service disruptions or failures or other quality issues. In addition, profitability, if any, in our newer activities may not meet our expectations, and we may not be successful enough in these newer activities to recoup our investments in them. Failure to realize the benefits of amounts we invest in new technologies, products, or services could result in the value of those investments being written down or written off.
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If we are unable to keep up with rapid technological change, we may be unable to meet the needs of our customers, which could materially and adversely affect our financial condition and results of operations and reduce our ability to grow our market share.
Our market is characterized by rapid technological change and frequent new product announcements. Significant technological changes could render our existing technology obsolete. We are active in the research and development of new products and technologies and in enhancing our current products. However, research and development in our industry is complex and filled with uncertainty. For example, it is common for research and development projects to encounter delays due to unforeseen problems, resulting in low initial volume production, fewer product features than originally considered desirable and higher production costs than initially budgeted, any of which may result in lost market opportunities. In addition, these new products may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance. If our efforts do not lead to the successful development, marketing and release of new products that respond to technological developments or changing customer needs and preferences, our revenues and market share could be materially and adversely affected. We may expend a significant amount of resources in unsuccessful research and development efforts. In addition, new products or enhancements by our competitors may cause customers to defer or forego purchases of our products. Any of the foregoing could materially and adversely affect our financial condition and results of operations and reduce our ability to grow our market share.
We may be subject to breaches of our information technology systems, which could damage our reputation, vendor, and customer relationships, and our customers’ access to our services.
Our business operations require that we use and store sensitive data, including intellectual property and proprietary business information in our secure data centers and on our networks. We face a number of threats to our data centers and networks in the form of unauthorized access, security breaches and other system disruptions. It is critical to our business strategy that our infrastructure remains secure and is perceived by customers and partners to be secure. We require user names and passwords in order to access our information technology systems. We also use encryption and authentication technologies to secure the transmission and storage of data. Despite our security measures, our information technology systems may be vulnerable to attacks by hackers or other disruptive problems. Any such security breach may compromise information used or stored on our networks and may result in significant data losses or theft of our, our customers’, or our business partners’ intellectual property or proprietary business information. A cybersecurity breach could negatively affect our reputation by adversely affecting the market’s perception of the security or reliability of our products or services. In addition, a cyber-attack could result in other negative consequences, including remediation costs, disruption of internal operations, increased cybersecurity protection costs, lost revenues or litigation, which could have a material adverse effect on our business, results of operations and financial condition.
The industry in which we operate is highly competitive, and competitive pressures from existing and new companies could have a material adverse effect on our financial condition and results of operations.
The industry in which we operate is highly competitive and influenced by the following:
| ● | advances in technology; | |
| ● | new product introductions; | |
| ● | evolving industry standards; | |
| ● | product improvements; | |
| ● | rapidly changing customer needs; | |
| ● | intellectual property invention and protection; | |
| ● | marketing and distribution capabilities; | |
| ● | ability to attract and retain highly skilled professionals; | |
| ● | competition from highly capitalized companies; | |
| ● | entrance of new competitors; | |
| ● | ability of customers to invest in information technology; and | |
| ● | price competition. |
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The products marketed by us and our competitors are becoming more complex. As the technological and functional capabilities of future products increase, these products may begin to compete with products being offered by traditional computer, network and communications industry participants that have substantially greater financial, technical, marketing and manufacturing resources than we do.
Although we are not aware of any current competitors that provide the precise capabilities of our systems, we are aware of competitors that offer similar approaches to address the customer needs that our products address. Those companies include both emerging companies with limited operating histories and companies with longer operating histories, greater name recognition and/or significantly greater financial, technical and marketing resources than ours.
We attempt to differentiate our solutions by continuing to innovate and by offering a choice of communication mode, patented battery management technology, sensor options, and installation configurations.
If we do not keep pace with product and technology advances, including the development of superior products by our competitors, or if we are unable to otherwise compete successfully against our competitors, there could be a material adverse effect on our competitive position, revenues and prospects for growth. As a result, our financial condition and results of operations could be materially and adversely affected.
We may not be able to successfully execute our strategic initiatives or meet our long-term financial goals.
We have been engaged in strategic initiatives to focus on our core business to maximize long-term stockholder value, to improve our cost structure and efficiency and to increase our selling efforts and developing new business. We cannot provide any assurance that we will be able to successfully execute these or other strategic initiatives or that we will be able to execute these initiatives on our expected timetable. We may not be successful in focusing our core business and obtaining operational efficiencies or replacing revenues lost as a result of these strategic initiatives.
We are an international company and may be susceptible to a number of political, economic and geographic risks that could harm our business.
We are dependent on sales to customers outside the U.S. Our international sales are likely to account for a significant percentage of our products and services revenue for the foreseeable future. As a result, the occurrence of any international, political, economic or geographic event (for example, the COVID-19 pandemic, continued global supply chain disruptions, inflation and other cost increases, and the conflict between Russia and Ukraine) could result in a significant decline in our revenue. In addition, compliance with complex foreign and U.S. laws and regulations that apply to our international operations will increase our cost of doing business in international jurisdictions. These numerous and sometimes conflicting laws and regulations include internal control and disclosure rules, data privacy and filtering requirements, anti-corruption laws, such as the Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and anti-competition regulations, among others. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, international expansion efforts, ability to attract and retain employees, business, and operating results. Although we plan to implement policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
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Some of the risks and challenges of doing business internationally include:
| ● | unexpected changes in regulatory requirements; | |
| ● | fluctuations in international currency exchange rates including its impact on unhedgeable currencies and our forecast variations for hedgeable currencies; | |
| ● | imposition of tariffs and other barriers and restrictions; | |
| ● | management and operation of an enterprise spread over various countries; | |
| ● | the burden of complying with a variety of laws and regulations in various countries; | |
| ● | application of the income tax laws and regulations of multiple jurisdictions, including relatively low-rate and relatively high-rate jurisdictions, to our sales and other transactions, which results in additional complexity and uncertainty; | |
| ● | the conduct of unethical business practices in certain developing countries; | |
| ● | general economic and geopolitical conditions, including inflation and trade relationships; | |
| ● | war and acts of terrorism; | |
| ● | kidnapping and high crime rate; | |
| ● | natural disasters or pandemics (for example, the COVID-19 pandemic); | |
| ● | availability of U.S. dollars especially in countries with economies highly dependent on resource exports, particularly oil; and | |
| ● | changes in export regulations. |
While these factors and the impacts of these factors are difficult to predict, any one or more of them could adversely affect our business, financial condition and results of operations in the future.
Conditions and changes in the global economic environment may adversely affect our business and financial results.
The global economy continues to be adversely affected by stock market volatility, tightening of credit markets, concerns of inflation, adverse business conditions and liquidity concerns. These events and the related uncertainty about future economic conditions could negatively impact our customers and, among other things, postpone their decision-making, decrease their spending and jeopardize or delay their ability or willingness to make payment obligations, any of which could adversely affect our business and results of operations. Uncertainty about current global economic conditions, in particular as a result of the COVID-19 pandemic, continued global supply chain disruptions, inflation and other cost increases, and the conflict between Russia and Ukraine, could also cause volatility of our stock price. During periods of economic downturns, our customers may decrease their demand for wireless technology solutions, as well as the maintenance, support and consulting services we provide. This slowdown may have an adverse effect on the wireless solutions industry in general and on demand for our products and services, but the magnitude of that impact is uncertain. Our future growth is dependent, in part, upon the demand for our products and services. Prolonged weakness in the economy may cause business enterprises to delay or cancel wireless solutions projects, reduce their overall wireless solutions budgets and/or reduce or cancel orders for our services. This, in turn, may lead to longer sales cycles, delays in purchase decisions, and payment and collection issues, and may also result in price pressures, causing us to realize lower revenues and operating margins. Additionally, if our customers cancel or delay their wireless solutions initiatives, our business, financial condition and results of operations could be materially and adversely affected. If the current uncertainty in the general economy does not change or continue to improve, our business, financial condition and results of operations could be harmed.
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The international scope of our business exposes us to risks associated with foreign exchange rates.
We report our financial results in U.S. dollars. However, a significant portion of our net sales, assets, indebtedness and other liabilities, and costs are denominated in foreign currencies. These currencies include, among others, the Euro, Israeli shekel, British pound sterling, Mexican peso, Argentine peso, Brazilian real and South African rand.
In addition, several emerging market economies are particularly vulnerable to the impact of rising interest rates, inflationary pressures, and large external deficits. Risks in one country can limit our opportunities for growth and negatively affect our operations in another country or countries. As a result, any such unfavorable conditions or developments could have an adverse impact on our operations. Our results of operations and, in some cases, cash flows, have in the past been, and may in the future be, adversely affected by movements in exchange rates. In addition, we may also be exposed to credit risks in some of those markets. We may implement currency hedges or take other actions intended to reduce our exposure to changes in foreign currency exchange rates. If we are not successful in mitigating the effects of changes in exchange rates on our business, any such changes could materially impact our results.
We expect that the impact of COVID-19 will continue to adversely affect our business, results of operations and financial condition.
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. COVID-19 may continue to negatively affect our future business, results of operations and financial condition. The duration and 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.
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We may need to obtain additional capital to fund our operations that could have negative consequences on our business.
We may require additional capital in the future to develop and commercialize additional products and technologies or take advantage of other opportunities that may arise, including potential acquisitions. We may seek to raise the necessary funds through public or private equity offerings, debt financings, additional operating improvements, asset sales or strategic alliances and licensing arrangements. We have on file a shelf registration statement on Form S-3 that was declared effective by the SEC on November 27, 2019. The shelf registration statement allows us to raise up to an aggregate of $60.0 million from the sale of common stock, preferred stock, warrants, debt securities and units or any combination of the foregoing. 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 809,846 shares of common stock for approximately $4.2 million in gross proceeds. We terminated the equity distribution agreement effective as of August 14, 2020. On February 1, 2021, we closed an underwritten public offering (the “Underwritten Public Offering”) of 4,427,500 shares of common stock (which includes the full exercise of the underwriters’ over-allotment option) for gross proceeds of approximately $28.8 million, before deducting the underwriting discounts and commissions and other estimated offering expenses. The offer and sale of common stock in the ATM Offering and the Underwritten Public Offering were made pursuant to our shelf registration statement.
To the extent we raise additional capital by issuing equity securities, including pursuant to our shelf registration statement, our existing stockholders may experience substantial dilution. In addition, we may be required to relinquish rights to our technologies or systems, or grant licenses on terms that are not favorable to us in order to raise additional funds through strategic alliance, joint venture and licensing arrangements. We cannot provide assurance that the additional sources of funds will be available, or if available, would have reasonable terms. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our development programs, and our business, financial condition, results of operations and stock price could be materially and adversely affected.
If the market for our technology does not develop or become sustainable, expands more slowly than we expect or becomes saturated, our revenues will decline and our financial condition and results of operations could be materially and adversely affected.
Our success is highly dependent on the continued market acceptance of our solutions. The market for our products and services is new and rapidly evolving. If the market for our products and services does not become sustainable, or becomes saturated with competing products or services, our revenues will decline and our financial condition and results of operations could be materially and adversely affected.
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We may incur additional charges for excess and obsolete inventory, which could adversely affect our cost of sales and gross profit.
While we strive to effectively manage our inventory, due to rapidly changing technology, and uneven customer demand, product cycles tend to be short and the value of our inventory may be adversely affected by changes in technology that affect our ability to sell the products in our inventory. If we do not effectively forecast and manage our inventory, we may need to write off inventory as excess or obsolete, which in turn, can adversely affect our cost of sales and gross profit.
We have previously experienced, and may in the future experience, reductions in sales of older generation products as customers delay or defer purchases in anticipation of new product introductions. The reserves we have established for potential losses due to obsolete inventory may, however, prove to be inadequate and may give rise to additional charges for obsolete or excess inventory.
The long and variable sales cycles for our solutions may cause our revenues and operating results to vary significantly from quarter to quarter or year to year, which could adversely affect the market price of our common stock.
We expect that many customers who utilize our solutions will do so as part of a large-scale deployment of these solutions across multiple or all divisions of their organizations. A customer’s decision to deploy our solutions throughout its organization will involve a significant commitment of its resources. Accordingly, initial implementations may precede any decision to deploy our solutions enterprise-wide. Throughout this sales cycle, we may spend considerable time and expense educating and providing information to prospective customers about the benefits of our solutions.
The timing of the deployment of our solutions may vary widely and will depend on the specific deployment plan of each customer, the complexity of the customer’s organization and the difficulty of such deployment. Customers with substantial or complex organizations may deploy our solutions in large increments on a periodic basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis. Because of our limited operating history and the nature of our business, we cannot predict the timing or size of these sales and deployment cycles. Long sales cycles, as well as our expectation that customers will tend to place large orders sporadically with short lead times, may cause our revenue and results of operations to vary significantly and unexpectedly from quarter to quarter. These variations could materially and adversely affect the market price of our common stock.
We rely significantly on channel partners to sell our products, and disruptions to, or our failure to develop and manage our channel partners would harm our business.
Recruiting and retaining qualified channel partners and training them in our technology and product offerings requires significant time and resources. In order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support our channel, including investment in systems and training. Those processes and procedures may become increasingly complex and difficult to manage as we grow our organization. We have no minimum purchase commitments from any of our channel partners, and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours. Our competitors may provide incentives to existing and potential channel partners to favor their products or to prevent or reduce sales of our products. Our channel partners may choose not to offer our products exclusively or at all. Establishing relationships with channel partners who have a history of selling our competitors’ products may also prove to be difficult. Our failure to establish and maintain successful relationships with channel partners would harm our business and operating results.
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If we are unable to protect our intellectual property rights, our financial condition and results of operations could be materially and adversely affected.
We rely on a combination of patents, copyrights, trademarks, trade secrets and contractual measures to protect our intellectual property rights. Third parties may seek to challenge, invalidate, circumvent or render unenforceable any patents or proprietary rights owned by us. If such challenges are successful, our business will be materially and adversely affected.
Our employees, consultants and advisors enter into confidentiality agreements with us that prohibit the disclosure or use of our confidential information. We also have entered into confidentiality agreements to protect our confidential information delivered to third parties for research and other purposes. Despite these efforts, we cannot assure you that we will be able to effectively enforce these agreements or our confidential information will not be disclosed, that others will not independently develop substantially equivalent confidential information and techniques or otherwise gain access to our confidential information or that we can meaningfully protect our confidential information.
Disputes may arise in the future with respect to the ownership of rights to any technology developed with advisors or collaborators. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our systems, or could require or result in costly and time-consuming litigation that may not be decided in our favor. Any such event could materially and adversely affect our financial condition and results of operations.
Policing the unauthorized use of our intellectual property is difficult, and we cannot assure you that the steps we have taken will prevent unauthorized use of our technology or other intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Accordingly, we may not be able to protect our proprietary rights against unauthorized third party copying or use. If we are unsuccessful in protecting our intellectual property, we may lose any technological advantages we have over competitors and our financial condition and results of operations could be materially and adversely affected.
We may become involved in an intellectual property dispute that could subject us to significant liability, divert the time and attention of our management and prevent us from selling our products, any of which could materially and adversely affect our financial condition and results of operations.
In recent years, there has been significant litigation in the United States and internationally involving claims of alleged infringement of patents and other intellectual property rights. Litigation may be necessary to enforce our intellectual property rights, defend ourselves against alleged infringement and determine the scope and validity of our intellectual property rights.
Any such litigation, whether or not successful, could result in substantial costs, divert the time and attention of our management and prevent us from selling our products. If a claim of patent infringement was decided against us, we could be required to, among other things:
| ● | pay substantial damages to the party making such claim; | |
| ● | stop selling, making, having made or using products or services that incorporate the challenged intellectual property; | |
| ● | obtain from the holder of the infringed intellectual property right a license to sell, make or use the relevant technology, which license may not be available on commercially reasonable terms, or at all; or | |
| ● | redesign those products or services that incorporate such intellectual property. |
The failure to obtain the necessary licenses or other rights could preclude the sale, manufacture or distribution of our products and could materially and adversely affect our financial condition and results of operations.
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We rely on subcontractors to manufacture and deliver our products. Any quality or performance failures by our subcontractors or changes in their financial condition could disrupt our ability to supply quality products to our customers in a timely manner, resulting in business interruptions, increased costs, claims for damages, reputation damage and reduced revenue.
In order to meet the requirements under our customer contracts, we rely on subcontractors to manufacture and deliver our products to our customers. Any quality or performance failures by our subcontractors or changes in their financial or business condition could disrupt our ability to supply quality products to our customers in a timely manner. If we are unable to fulfill orders from our customers in a timely manner, we could experience business interruptions, increased costs, damage to our reputation and loss of our customers. In addition, we may be subject to claims from our customers for failing to meet our contractual obligations. Although we have several sources for production, the inability to provide our products to our customers in a timely manner could result in the loss of customers and our revenues could be materially reduced. In addition, there is great competition for the most qualified and competent subcontractors. If we are unable to hire qualified subcontractors, the quality of our services and products could decline. Furthermore, third-party manufacturers in the electronic component industry are consolidating. The consolidation of third-party manufacturers may give remaining manufacturers greater leverage to increase the prices that they charge, thereby increasing our manufacturing costs. If this were to occur and we are unable to pass the increased costs onto our customers, our profitability could be materially and adversely affected.
Our manufacturers rely on a limited number of suppliers for several significant components and raw materials used in our products. If we or our manufacturers are unable to obtain these components or raw materials on a timely basis, we will be unable to meet our customers’ orders, which could reduce our revenues, subject us to claims for damages and adversely affect our relationships with our customers.
We rely on a limited number of suppliers for the components and raw materials used in our products. Although there are many suppliers for most of our component parts and raw materials, we are dependent on a limited number of suppliers for many of our significant components and raw materials. This reliance involves a number of significant risks, including:
| ● | unavailability of materials and interruptions in delivery of components and raw materials from our suppliers, which could result in manufacturing delays; and | |
| ● | fluctuations in the quality and price of components and raw materials. |
We currently do not have any long-term or exclusive purchase commitments with any of our suppliers. In addition, our suppliers may enter into exclusive arrangements with our competitors, be acquired by our competitors, or stop selling their products or components to us on commercially reasonable terms or at all. We may not be able to develop alternative sources for the components and raw materials. Even if alternate suppliers are available to us or our manufacturers, identifying them is often difficult and time consuming. If we or our manufacturers are unable to obtain an ample supply of product or raw materials from our existing suppliers or alternative sources of supply, we may be unable to satisfy our customers’ orders, which could reduce our revenues, subject us to claims for damages and adversely affect our relationships with our customers.
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The federal government or independent standards organizations may implement significant regulations or standards that could adversely affect our ability to produce or market our products.
Our products transmit radio frequency waves, the transmission of which is governed by the rules and regulations of the FCC, as well as other federal and state agencies. Our ability to design, develop and sell our products will continue to be subject to these rules and regulations for the foreseeable future. In addition, our products and services may become subject to independent industry standards. The implementation of unfavorable regulations or industry standards, or unfavorable interpretations of existing regulations by courts or regulatory bodies, could require us to incur significant compliance costs, cause the development of the affected products to become impractical or otherwise adversely affect our ability to produce or market our products. The adoption of new industry standards applicable to our products may require us to engage in rapid product development efforts that would cause us to incur higher expenses than we anticipated. In some circumstances, we may not be able to comply with such standards, which could materially and adversely affect our ability to generate revenues through the sale of our products.
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Because our products are complex, they may have undetected errors or failures when they are introduced, which could seriously harm our business, and our product liability insurance may not adequately protect us.
Technical products like ours often contain undetected errors or failures when first introduced. Despite our efforts to eliminate these flaws, there still may be errors or failures in our products, even after the commencement of commercial shipments. We provide a warranty reserve at the time of shipment, which may not be sufficient to cover actual repair costs. Because our products are used in business-critical applications, we could be subject to product liability claims if our systems fail to perform as intended. Even unsuccessful claims against us could result in costly litigation and the diversion of management’s time and resources and could damage our reputation and impair the marketability of our systems. Although we maintain insurance, there are no assurances that:
| ● | our insurance will provide adequate coverage against potential liabilities if our products cause harm or fail to perform as promised; or | |
| ● | adequate product liability insurance will continue to be available to us in the future on commercially reasonable terms or at all. |
If our insurance is insufficient to pay any product liability claims, our financial condition and results of operations could be materially and adversely affected. In addition, any such claims could permanently injure our reputation and customer relationships.
Changes in practices of insurance companies in the markets in which we provide and sell our SVR services and products could adversely affect our revenues and growth potential.
We depend on the practices of insurance companies in the markets in which we provide our SVR services and sell our SVR products. In Israel, which is our main SVR market, most of the insurance companies either mandate the use of SVR services and products for certain cars, or their equivalent, as a prerequisite for providing insurance coverage to owners of certain medium and high-end vehicles, or provide insurance premium discounts to encourage vehicle owners to subscribe to services and purchase products such as ours. Therefore, we rely on insurance companies’ continued practice of accepting vehicle location and recovery technology as a preferred security product.
If any of these policies or practices changes, for regulatory or commercial reasons, or if market prices for these services fall, revenues from sales of our SVR services and products, primarily in Israel, could decline, which could adversely affect our revenues and growth potential.
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A decline in sales of consumer or commercial vehicles in the markets in which we operate could result in reduced demand for our products and services.
Our products are primarily installed before or immediately after the initial sale of private or commercial vehicles. Consequently, a reduction in sales of new vehicles could reduce our market for services and products. New vehicle sales may decline for various reasons, including inflation, an increase in new vehicle tariffs, taxes or gas prices, an increased difficulty in obtaining credit or financing in the applicable local or global economy, or the occurrence of natural disasters or public health crises, such as the COVID-19 pandemic. A decline in sales of new vehicles in the markets in which we operate could result in reduced demand for our services and products.
A reduction in vehicle theft rates may adversely impact demand for our SVR services and products.
Demand for our SVR services and products, depends primarily on prevailing or expected vehicle theft rates. Vehicle theft rates may decline as a result of various factors such as the availability of improved security systems, implementation of improved or more effective law enforcement measures, or improved economic or political conditions in markets that have high theft rates. If vehicle theft rates in some of, or entire of, our existing markets decline, or if insurance companies or our other customers believe that vehicle theft rates have declined or are expected to decline, demand for our SVR services and products may decline.
The increasing availability of handheld GPRS devices may reduce the demand for our products for small fleet management.
The increasing availability of low-cost handheld GPRS devices and smartphones may result in a decrease in the demand for our products by managers of small auto fleets or providers of low-level services. The availability of such devices has expanded considerably in recent years. Any such decline in demand for our products could cause a decline in our revenues and profitability.
The use of our products is subject to international regulations.
The use of our products is subject to regulatory approvals of government agencies in each of the countries in which our systems are operated, including Israel. Our operators typically must obtain authorization from each country in which our systems and products are installed. While in general, operators have not experienced problems in obtaining regulatory approvals to date, the regulatory schemes in each country are different and may change from time to time. We cannot guarantee that approvals, which our operators have obtained, will remain sufficient in the view of regulatory authorities. In addition, we cannot assure you that third party operators of our systems and products will obtain licenses and approvals in a timely manner in all jurisdictions in which we wish to sell our systems or that restrictions on the use of our systems will not be unduly burdensome.
The adoption of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or products and could harm our results of operations.
There are no established industry standards in all of the businesses in which we sell our products. For example, vehicle location devices may operate by employing various technologies, including network triangulation, GPS, satellite-based or network-based cellular or direction-finding homing systems. The development of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or products and we may not be able to develop new services and products that are in compliance with such new industry standards on a cost-effective basis. If industry standards develop and such standards do not incorporate our products and we are unable to effectively adapt to such new standards, such development could harm our results of operations.
Our financial statements may not reflect certain payments we may be required to make to employees.
In certain countries, we are not required to reflect future severance fees in our liabilities. In countries such as Argentina, Brazil and Mexico, companies do not generally dedicate amounts to potential future severance payments. Nonetheless, in such cases, companies must pay a severance payment in cash upon termination of employment. We also do not have a provision in our financial statements for potential future severance payments in the above countries and instead such expenses are recorded when such payments are actually made upon termination of employment. As a result, our financial statements may not adequately reflect possible future severance payments.
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Some of our employees in our subsidiaries are members of labor unions and a dispute between us and any such labor union could result in a labor strike that could delay or preclude altogether our ability to generate revenues in the markets where such employees are located.
Some of our employees in our subsidiaries are members of labor unions. If a labor dispute were to develop between us and our unionized employees, such employees could go on strike and we could suffer work stoppage for a significant period of time. A labor dispute can be difficult to resolve and may require us to seek arbitration for resolution, which can be time-consuming, distracting to management, expensive and difficult to predict. The occurrence of a labor dispute with our unionized employees could delay or preclude altogether our ability to generate revenues in the markets where such employees are located. In addition, labor disputes with unionized employees may involve substantial demands on behalf of the unionized employees, including substantial wage increases, which may not be correlated with our performance, thus impairing our financial results. Furthermore, labor laws applicable to our subsidiaries may vary and there is no assurance that any labor disputes will be resolved in our favor.
Under the current laws in jurisdictions in which we operate, we may not be able to enforce non-compete covenants and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
We currently have non-competition agreements with many of our employees. However, due to the difficulty of enforcing non-competition agreements globally, not all of our employees in foreign jurisdictions have such agreements. These agreements generally prohibit our employees, if they cease working for the Company, from directly competing with us or working for our competitors for a certain period of time following termination of their employment agreements. Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
Manufacturing of many of our products is highly complex, and an interruption by suppliers, subcontractors or vendors could adversely affect our business, financial condition or results of operations.
Many of our products are the result of complex manufacturing processes and are sometimes dependent on components with a limited source of supply. As a result, we can provide no assurances that supply sources will not be interrupted from time to time. Furthermore, our subcontractors or vendors may fail to obtain supply components and fail to deliver our products. As a result, a failure to deliver by our subcontractors or vendors can result in decreased revenues. Such interruption or delay of our suppliers to deliver components or interruption or delay of our vendors or subcontractors to deliver our products could affect our business, financial condition or results of operations.
Our Israeli subsidiaries have incurred significant indebtedness to finance the Transactions.
In connection with the Transactions, PowerFleet Israel Ltd. (“PowerFleet Israel”) and Pointer entered into a credit agreement, dated August 19, 2019 (the “Credit Agreement”), with Bank Hapoalim B.M. (“Hapoalim”), pursuant to which Hapoalim agreed to provide PowerFleet Israel with two senior secured term loan facilities in an aggregate principal amount of $30,000,000 (comprised of two facilities in the aggregate principal amount of $20,000,000 and $10,000,000) and a five-year revolving credit facility to Pointer in an aggregate principal amount of $10,000,000. The outstanding amount under the term loan facilities was $24,400,000 as of December 31, 2021. Such indebtedness will have the effect, among other things, of reducing PowerFleet Israel’s and Pointer’s flexibility to respond to changing business and economic conditions, will increase our borrowing costs and, to the extent that such indebtedness is subject to floating interest rates, may increase PowerFleet Israel’s and Pointer’s vulnerability to fluctuations in market interest rates. The Credit Agreement requires PowerFleet Israel and Pointer to satisfy various covenants, including negative covenants that directly or indirectly restrict our ability to engage in certain transactions without the consent of the lender. The indebtedness is secured by first ranking and exclusive fixed and floating charges, including by PowerFleet Israel over the entire share capital of Pointer and by Pointer over all of its assets, as well as cross guarantees between PowerFleet Israel and Pointer. This may also make it more difficult for us to engage in future transactions without the consent of the lender. The increased levels of indebtedness could also reduce funds available to fund efforts to integrate I.D. Systems’ and Pointer’s businesses and realize expected benefits of the Transactions and/or engage in investments in product development, capital expenditures and other activities and may create competitive disadvantages for us relative to other companies with lower debt levels. We may be required to raise additional financing for working capital, capital expenditures, acquisitions or other general corporate purposes. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond its control. We cannot assure you that we will be able to obtain additional financing on terms acceptable to us or at all.
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The terms of the Credit Agreement restrict PowerFleet Israel’s and Pointer’s current and future operations, particularly their ability to respond to changes or to take certain actions.
The Credit Agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on PowerFleet Israel and Pointer and limit their ability to engage in acts that may be in their long-term best interest, including restrictions on their ability to:
| ● | incur or guarantee additional indebtedness; | |
| ● | incur liens; | |
| ● | sell or otherwise dispose of assets; | |
| ● | enter into transactions with affiliates; and | |
| ● | enter into new lines of business. |
The Credit Agreement also limits the ability of PowerFleet Israel and Pointer to consolidate or merge with or into another person.
In addition, the covenants in the Credit Agreement require PowerFleet Israel and Pointer to maintain specified financial ratios, tested quarterly. Their ability to meet those financial ratios can be affected by events beyond their control, and they may be unable to meet them.
A breach of the covenants or restrictions under the Credit Agreement could result in an event of default, which may allow the lender to accelerate the indebtedness thereunder. In addition, an event of default under the Credit Agreement would permit the lender to terminate all commitments to extend further credit pursuant to the revolving credit facility. Furthermore, if PowerFleet Israel and Pointer are unable to repay the amounts due and payable under the Credit Agreement, the lender could proceed against the collateral granted to it to secure the indebtedness under the Credit Agreement. In the event the lender accelerates the repayment of borrowings, PowerFleet Israel and Pointer may not have sufficient assets to repay that indebtedness.
As a result of these restrictions, we may be:
| ● | limited in our flexibility in planning for, or reacting to, changes in our business and the markets we serve; | |
| ● | unable to raise additional debt or equity financing to fund working capital, capital expenditures, new product development expenses and other general corporate requirements; or | |
| ● | unable to compete effectively or to take advantage of new business or strategic acquisition opportunities. |
These restrictions may affect our ability to grow in accordance with our strategy.
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If we lose our executive officers, or are unable to recruit additional personnel, our ability to manage our business could be materially and adversely affected.
We are dependent on the continued employment and performance of our executive officers. We currently do not have employment agreements with any of our executive officers. Like other companies in our industry, we face intense competition for qualified personnel. Many of our competitors have greater resources than we have to hire qualified personnel. Accordingly, if we are not successful in attracting or retaining qualified personnel in the future, our ability to manage our business could be materially and adversely affected.
We provide no assurance that we will be able to successfully integrate any businesses, products, technologies or personnel that we have acquired or might acquire in the future.
We may, from time to time, continue to consider investments in or acquisitions of complementary companies, products or technologies. In the event of any future acquisitions, we could:
| ● | issue stock that would dilute our current stockholders’ percentage ownership; | |
| ● | incur debt; | |
| ● | assume liabilities; | |
| ● | incur expenses related to the impairment of goodwill; or | |
| ● | incur large and immediate write-offs. |
We may not be able to identify suitable acquisition candidates, and if we do identify suitable candidates, we may not be able to make these acquisitions on acceptable terms, or at all.
Our operation of any acquired business will also involve numerous risks, including:
| ● | problems integrating the acquired operations, personnel, technologies or products; | |
| ● | unanticipated costs; | |
| ● | diversion of management’s time and attention from our core businesses; | |
| ● | adverse effects on existing business relationships with suppliers and customers; | |
| ● | risks associated with entering markets in which we have no or limited prior experience; and | |
| ● | potential loss of key employees, particularly those of acquired companies. |
In addition, if we make changes to our business strategy or if external conditions adversely affect our business operations, we may be required to record an impairment charge for goodwill or intangibles, which would lead to decreased assets and reduced net operating performance.
The unpredictability of our quarterly operating results could adversely affect the market price of our common stock.
Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control, and any of which could adversely affect the market price of our common stock. The main factors that may affect us include the following:
| ● | variations in the sales of our products to our significant customers; | |
| ● | variations in the mix of products and services provided by us; |
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| ● | the timing and completion of initial programs and larger or enterprise-wide purchases of our products by our customers; | |
| ● | the length and variability of the sales cycle for our products; | |
| ● | the timing and size of sales; | |
| ● | changes in market and economic conditions, including fluctuations in demand for our products; and | |
| ● | announcements of new products by our competitors. |
As a result of these and other factors, revenues for any quarter are subject to significant variation that could adversely affect the market price for our common stock.
We provide financing to our customers for the purchase of our products, which may increase our credit risks in the event of a deterioration in a customer’s financial condition or in global credit conditions.
We sell our products to a wide range of customers in the commercial and governmental sectors. We provide financing to customers for a portion of such sales which could be in the form of notes or leases receivable over two to five years. Although these customers are extended credit terms which are approved by us internally, our business could be materially and adversely affected in the event of a deterioration of the financial condition of one or more of our customers that results in such customers’ inability to repay us. This risk may increase during a general economic downturn affecting a large number of our customers or a widespread deterioration in global credit conditions, and in the event our customers do not adequately manage their businesses or properly disclose their financial condition.
Our cash and cash equivalents could be adversely affected by a downturn in the financial and credit markets.
We maintain our cash and cash equivalents with major financial institutions; however, our cash and cash equivalent balances with these institutions exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor on a systematic basis the cash and cash equivalent balances in our operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit our cash and cash equivalents fails or is subject to other adverse conditions in the financial or credit markets. To date, we have experienced no loss of principal or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be affected if the financial institutions in which we hold our cash and cash equivalents fail or the financial and credit markets deteriorate.
Goodwill impairment or intangible impairment charges may affect our results of operations in the future.
We test goodwill for impairment on an annual basis and more often if events occur or circumstances change that would likely reduce the fair value of a reporting unit to an amount below its carrying value. We also test for other possible intangible impairments if events occur or circumstances change that would indicate that the carrying amount of such intangible may not be recoverable. Any resulting impairment loss would be a non-cash charge and may have a material adverse impact on our results of operations in any future period in which we record a charge.
Long-lived assets with determinable useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such charges could have a material adverse effect on our results of operations in the period in which they are recorded.
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In connection with the preparation of our annual financial statements for the fiscal year ended December 31, 2021, we identified a material weakness in our internal control over financial reporting. Any failure to maintain effective internal control over financial reporting could harm us.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. 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 in accordance with U.S. generally accepted accounting principles. We identified a material weakness in our internal control over financial reporting as of December 31, 2021, which has not been remediated (see Item 9A of this Annual Report on Form 10-K for more information). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Our management has concluded that a material weakness in our internal control over financial reporting existed as of December 31, 2021 due to the lack of controls to ensure accurate reporting of financial results in Israel.
We are still considering the full extent of the procedures to implement in order to remediate the material weakness described above; however, the current remediation plan includes: (i) utilizing external resources to support our efforts to rework certain control gaps across the various processes in Israel with identified deficiencies, (ii) implementing enhanced documentation associated with management review controls and validation of the completeness and accuracy of key reports in Israel, and (iii) training relevant personnel to reinforce existing policies and enhancing policies with regard to appropriate steps and procedures required to be performed related to the execution and documentation of internal controls. We cannot assure you that any of our remedial measures will be effective in resolving this material weakness or that we will not suffer from other material weaknesses in the future.
If our management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, or if additional material weaknesses in our internal controls are identified in the future, we could be subject to regulatory scrutiny and a loss of public confidence, which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to manage our business effectively or accurately report our financial performance on a timely basis, which could cause a decline in our common stock price and adversely affect our results of operations and financial condition.
We have operations located in Israel, and therefore our results may be adversely affected by political, military and economic conditions in Israel.
Our subsidiaries PowerFleet Israel and Pointer operate in Israel, and therefore our business and operations may be directly influenced by the political, economic and military conditions affecting Israel at any given time. A change in the security and political situation in Israel could have a material adverse effect on our business, operating results and financial condition. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, including Hezbollah in Lebanon and Hamas in the Gaza Strip. In the last several years, these conflicts have involved missile strikes against civilian targets in various parts of Israel, particularly in southern Israel where Pointer’s main offices and manufacturing facility are located and have negatively affected business conditions in Israel. In addition, political uprisings and conflicts in various countries in the Middle East, including Syria and Iraq, are affecting the political stability of those countries. It is not clear how this instability will develop and how it will affect the political and security situation in the Middle East.
In the event that our facilities are damaged as a result of hostile action or hostilities otherwise disrupt the ongoing operation of our facilities or the airports and seaports on which we depend to import and export our supplies and products, our ability to manufacture and deliver products to customers could be materially adversely affected. Additionally, the operations of our Israeli suppliers and contractors may be disrupted as a result of hostile action or hostilities, in which event our ability to deliver products to customers may be materially adversely affected.
Furthermore, several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities or political instability in the region continues or intensifies. These restrictions may limit materially our ability to obtain raw materials from these countries or sell our products to companies in these countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business, operating results and financial condition.
Any downturn in the Israeli economy may also have a significant impact on our business. Israel’s economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980’s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. The revenues of certain of our products and services may be adversely affected if fewer vehicles are used as a result of an economic downturn in Israel, an increase in use of mass transportation, an increase in vehicle related taxes, an increase in the imputed value of vehicles provided as a part of employee compensation or other macroeconomic changes affecting the use of vehicles. In addition, our SVR services significantly depend on Israeli insurance companies mandating subscription to a service such as the Company’s. If Israeli insurance companies cease to require such subscriptions, our business could be significantly adversely affected. We also rely on the renewal and retention of several operating licenses issued by certain Israeli regulatory authorities. Should such authorities fail to renew any of these licenses, suspend existing licenses, or require additional licenses, we may be forced to suspend or cease certain services we provide.
Many of our employees in Israel are required to perform military reserve duty.
All non-exempt male adult permanent residents of Israel under the age of 40, including some of Pointer’s employees, are obligated to perform military reserve duty and may be called to active duty under emergency circumstances. In the past there have been significant call ups of military reservists, and it is possible that there will be additional call-ups in the future. While Pointer has operated effectively despite these conditions in the past, we cannot assess the impact these conditions may have on it in the future, particularly if emergency circumstances occur. Our operations could be disrupted by the absence for a significant period of one or more of our key employees or a significant number of our other employees due to military service. Any disruption in our operations would harm our business.
We may be adversely affected by a change of the Israeli Consumer Price Index.
Our exposure to market rate risk for changes in the Israeli Consumer Price Index (the “Israeli CPI”) relates primarily to loans borrowed by us from banks and other lenders. While we do not currently have any loans linked to the Israeli CPI, we may require additional financing by means of loans linked to the Israeli CPI, in which case we will be exposed to the risk that the rate of Israeli CPI, which measures inflation in Israel, will exceed the rate of devaluation of the NIS in relation to the U.S. Dollar or that the timing of this devaluation lags behind inflation in Israel. This would have the effect of increasing the Dollar cost of our borrowings.
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By administrative order, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations, relating primarily to the length of the workday, pension contributions, insurance for work-related accidents, and other conditions of employment are applicable to our employees. In accordance with these provisions, the salaries of the Company’s employees are partially indexed to the Israeli CPI. In the event that inflation in Israel increases, we will have to increase the salaries of our employees in Israel.
The Argentine government may enact or enforce measures to preempt or respond to social unrest or economic turmoil which may adversely affect our business in Argentina.
Our subsidiary Pointer Argentina operates in Argentina, where the government has historically exercised significant influence over the country’s economy. In recent years, Argentina has faced nationwide strikes that disrupted economic activity and have heightened political tension and there has been a significant devaluation of the Argentine peso relative to the U.S. Dollar. In addition, future government policies to preempt, or in response to, social unrest may include expropriation, nationalization, forced renegotiation or modification of existing contracts, suspension of the enforcement of creditors’ rights, new taxation policies, customs duties and levies including royalty and tax increases and retroactive tax claims, and changes in laws and policies affecting foreign trade and investment. Such policies could destabilize the country and adversely and materially affect the economy, and thereby our business. Additionally, due to agreements with the General Workers’ Union in Argentina and the country’s high inflation rate, we may be required to increase employee salaries at a rate which could adversely affect Pointer Argentina’s business.
Economic uncertainty and volatility in Brazil may adversely affect our business.
We operate through our wholly owned subsidiary Pointer do Brasil Comercial Ltda. (“Pointer Brazil”) in Brazil, which has periodically experienced extremely high rates of inflation. In 2021, Brazil reached the double-digit inflation rate. Inflation, along with governmental measures to fight inflation and public speculation about possible future measures, has had significant negative effects on the Brazilian economy. In addition, future governmental actions, including actions to adjust the value of the Brazilian real, may trigger increases in inflation. There can be no assurance that inflation will not affect our business in Brazil in the future. In addition, any Brazilian government’s actions to maintain economic stability, as well as public speculation about possible future actions, may contribute significantly to economic uncertainty in Brazil. It is also difficult to assess the impact that turmoil in the credit markets will have on the Brazilian economy and on our future operations and financial results or our operations in Brazil.
The Brazilian currency has devalued frequently, including during the last two decades. Throughout this period, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations and periodic mini-devaluations, during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. There have been significant fluctuations in the exchange rates between Brazilian currency and the U.S. Dollar and other currencies.
Devaluation of the Brazilian real relative to the U.S. Dollar may create additional inflationary pressures in Brazil by generally increasing the price of imported products and requiring recessionary governmental policies to curb aggregate demand. On the other hand, further appreciation of the Brazilian real against the U.S. Dollar may lead to a deterioration of the current account and the balance of payments, as well as dampen export-driven growth. The potential impact of the floating exchange rate and measures of the Brazilian government aimed at stabilizing the Brazilian real is uncertain. In addition, a substantial increase in inflation may weaken investor confidence in Brazil, impacting our ability to finance our operations in Brazil.
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In August 2014, Pointer Brazil received a notice from the Brazilian tax authority alleging that it had not paid an aggregate of $190,000 in value-added tax, the Brazilian ICMS tax, plus $957,000 of interest and penalties, resulting in a total amount of $1,147,000 of alleged tax deficiency as of December 31, 2021. In July 2015, Pointer Brazil received another tax deficiency notice alleging that the services provided by Pointer Brazil should be classified as “telecommunication services” and therefore Pointer Brazil should be subject to the state value-added tax. The aggregate amount claimed to be owed under the notice was approximately $10,476,000 as of December 31, 2021. On August 14, 2018, the lower chamber of the State Tax Administrative Court in São Paulo rendered a decision that was favorable to Pointer Brazil in relation to the ICMS demands, but adverse with respect to the clerical obligation of keeping in good order a set of ICMS books and related tax receipts. The state has the opportunity to appeal to the higher chamber of the State Tax Administrative Court. While our legal counsel is of the opinion that it is probable that we will prevail in these proceedings and that no material costs will arise in respect to these claims, litigation is inherently subject to many uncertainties and we cannot provide any assurance that we will ultimately be successful.
The Brazilian government has exercised, and may continue to exercise, significant influence over the Brazilian economy.
The Brazilian economy has been characterized by significant involvement on the part of the Brazilian government, which often changes monetary, credit and other policies to influence Brazil’s economy. The Brazilian government’s actions to control inflation and affect other policies have often involved wage and price controls, the Central Bank’s base interest rates, as well as other measures.
Actions taken by the Brazilian government concerning the economy may have important effects on Brazilian corporations and other entities. Our financial condition and results of operations in Brazil may be adversely affected by the following factors and the Brazilian government’s response to the following factors:
| ● | devaluations and other exchange rate movements; | |
| ● | inflation; | |
| ● | investments; | |
| ● | exchange control policies; | |
| ● | employment levels; | |
| ● | social instability; | |
| ● | price instability; | |
| ● | energy shortages; | |
| ● | interest rates; | |
| ● | liquidity of domestic capital and lending markets; | |
| ● | tax policy; and | |
| ● | other political, diplomatic, social and economic developments in or affecting Brazil, including election years for president, governors, and national congress. |
Political instability in Brazil may adversely affect Brazil’s economy and investment levels and have a material adverse effect on the Company.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public and have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.
The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. Despite the ongoing recovery of the Brazilian economy, weak macroeconomic conditions in Brazil are expected to continue in 2022, political uncertainty can result from the presidential elections and the transition to a new government could have an adverse effect on our business, results of operations and financial condition.
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Any such new policies or changes to current policies may have a material adverse effect on the operations of our business in Brazil. Also, the political uncertainty resulting from the presidential elections and the transition to a new government may have an adverse effect on our business, results of operations and financial.
Economic uncertainty and volatility in Mexico may adversely affect our business.
Our subsidiaries Pointer Recuperacion Mexico S.A., de C.V. and Pointer Logistica y Monitoreo, S.A. de C.V. operate in Mexico, which has gradually experienced, since 2013, substantial decrease in the value of the Mexican peso against the U.S. dollar, together with growing inflation rates. The devaluation of the Mexican peso and rise in inflation rate has triggered demonstrations and heightened political tension. Severe devaluation may lead to future governmental actions, including actions to adjust the value of the Mexican peso, policies which may trigger further increases in inflation. There can be no assurance that inflation will not affect our business in Mexico in the future. In addition, any Mexican government’s actions to maintain economic stability, as well as public speculation about possible future actions, may contribute significantly to economic uncertainty in Mexico. Economic instability and or government imposition of exchange controls may also result in the disruption of the international foreign exchange markets and may limit our ability to transfer or convert pesos into U.S. Dollars and other currencies. Such policies could destabilize the country and adversely and materially affect the economy, and thereby our business. Additionally, due to agreements with the Confederation of Workers of Mexico in Mexico and the country’s high inflation rate, we may be required to increase employee salaries at a rate which could adversely affect our business.
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Risks Related to our Securities
Holders of our Series A Preferred Stock can exercise significant control over the Company, which could limit the ability of our stockholders to influence the outcome of key transactions, including a change of control.
In connection with the closing of the Transactions, we issued Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), to ABRY Senior Equity V, L.P., ABRY Senior Equity Co-Investment Fund V, L.P and ABRY Investment Partnership, L.P. (the “Investors”) pursuant to the terms of an Investment and Transaction Agreement, dated as of March 13, 2019 (as such agreement has been amended from time to time, the “Investment Agreement”). The Series A Preferred Stock represents a significant percentage of the aggregate voting power of the Company. Based on an initial conversion price of $7.319, the Investors, who are the initial holders of the Series A Preferred Stock, own approximately 17% of the Company on an as-converted basis as of March 10, 2022. Except as required by applicable law or as otherwise specifically set forth in our Amended and Restated Certificate of Incorporation (the “Charter”), the holders of Series A Preferred Stock will not be entitled to vote on any matter presented to our stockholders unless and until any holder of Series A Preferred Stock provides written notification to the Company that such holder is electing, on behalf of all holders of Series A Preferred Stock, to activate their voting rights and in doing so rendering the Series A Preferred Stock voting capital stock of the Company (such notice, a “Series A Voting Activation Notice”). From and after the delivery of Series A Voting Activation Notice, all holders of the Series A Preferred Stock will be entitled to vote with the holders of our common stock as a single class on an as-converted basis unless and until such time as the holders of at least a majority of the outstanding shares of Series A Preferred Stock provide further written notice to the Company that they elect to deactivate their voting rights. In addition, the aggregate voting power of the Series A Preferred Stock may increase further in connection with the accrual of dividends at an initial minimum rate of 7.5% per annum, which may be payable, at our election, in kind through the issuance of additional shares of Series A Preferred Stock. However, to the extent voting rights of the Series A Preferred Stock have been activated, any holder of Series A Preferred Stock shall not be entitled to cast votes for the number of shares of our common stock issuable upon conversion of shares of Series A Preferred Stock held by such holder that exceeds the quotient of (i) the aggregate Series A Issue Price (as defined below) for such shares of Series A Preferred Stock divided by (ii) $5.57 (subject to adjustment for stock splits, stock dividends, combinations, reclassifications and similar events, as applicable). As a result, the holders of shares of the Series A Preferred Stock have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders.
In addition, the Series A Preferred Stock will have representation on our board of directors and will have significant control over the management and affairs of the Company. So long as shares of Series A Preferred Stock remain outstanding and represent 15% or more, on an as-converted basis, of the voting power of our common stock (irrespective of whether or not a Series A Voting Activation Notice has been delivered to the Company), the holders of at least a majority of the outstanding shares of Series A Preferred Stock, voting as a separate class, will be entitled to elect two directors (the “Series A Directors”) to our board of directors and any committee or subcommittee thereof (subject to the application of SEC and Nasdaq independence requirements). So long as any shares of Series A Preferred Stock remain outstanding and represent less than 15% but not less than 5%, on an as-converted basis, of the voting power of our common stock (irrespective of whether or not a Series A Voting Activation Notice has been delivered to the Company), the holders of at least a majority of the outstanding shares of Series A Preferred Stock, voting as a separate class, will be entitled to elect one Series A Director to our board of directors. For so long as any shares of Series A Preferred Stock remain outstanding and there are no Series A Directors on our board of directors, the holders of at least a majority of the outstanding shares of Series A Preferred Stock, voting as a separate class, will be entitled to designate one non-voting observer to attend all meetings of our board of directors and committees and subcommittees thereof, although the observer may be excluded from executive sessions of any committee at the discretion of such committee.
Further, the Series A Preferred Stock will have consent rights over certain significant corporate transactions. So long as shares of Series A Preferred Stock are outstanding and convertible into shares of our common stock that represent at least 10% of the voting power of our common stock, or the Investors or their affiliates continue to hold at least 33% of the aggregate amount of Series A Preferred Stock issued to the Investors on the date on which any shares of Series A Preferred Stock are first issued (the “Original Issuance Date”), the consent of the holders of at least a majority of the outstanding shares of Series A Preferred Stock will be necessary for us to, among other things, (i) liquidate the Company or any operating subsidiary or effect any Deemed Liquidation Event (as defined in the Charter), except for a Deemed Liquidation Event in which the holders of Series A Preferred Stock receive an amount in cash not less than the Redemption Price (as defined below), (ii) amend our organizational documents in a manner that adversely affects the Series A Preferred Stock, (iii) issue any securities that are senior to, or equal in priority with, the Series A Preferred Stock or issue additional shares of Series A Preferred Stock to any person other than the Investors or their affiliates, (iv) incur indebtedness above the agreed-upon threshold, (v) change the size of our board of directors to a number other than seven, or (vi) enter into certain affiliated arrangements or transactions.
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The Series A Preferred Stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of holders of our common stock, which could adversely affect our liquidity and financial condition, and may result in the interests of the holders of Series A Preferred Stock differing from those of the holders of our common stock.
The Series A Preferred Stock ranks senior to the shares of our common stock, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the Company or upon a Deemed Liquidation Event. The Series A Preferred Stock has a liquidation preference equal to the greater of (i) $1,000 (subject to ratable adjustment in the case of stock dividends (other than preferred dividends), stock splits, reverse stock splits, combinations, divisions and reclassifications affecting the Series A Preferred Stock) (the “Series A Issue Price”) per share plus all accrued and unpaid dividends thereon (except in the case of a Deemed Liquidation Event, then 150% of such amount) and (ii) the amount such holder would have received if the Series A Preferred Stock had converted into our common stock immediately prior to such event.
In addition, holders of Series A Preferred Stock will be entitled to cumulative dividends at a minimum rate of 7.5% per annum, quarterly in arrears, as set forth in the Charter. Commencing on the 66-month anniversary of the Original Issuance Date, and on each monthly anniversary thereafter, the dividend rate will increase by 100 basis points, until the dividend rate reaches 17.5% per annum, subject to our right to defer the increase for up to three consecutive months on the terms set forth in the Charter. The dividends are payable at our election in kind, through the issuance of additional shares of Series A Preferred Stock, or in cash, provided no dividend payment failure has occurred and is continuing and that there have not previously occurred two or more dividend payment failures.
Further, at any time after (i) the 66-month anniversary of the Original Issuance Date, (ii) following delivery of a mandatory conversion notice by us, or (iii) upon a Deemed Liquidation Event, subject to Delaware law governing distributions to stockholders, the holders of the Series A Preferred Stock may elect to require us to redeem all or any portion of the outstanding shares of Series A Preferred Stock for an amount per share equal to the greater of (i) the product of (x) 1.5 multiplied by (y) the sum of the Series A Issue Price, plus all accrued and unpaid dividends and (ii) the product of (x) the number of shares of our common stock issuable upon conversion of such Series A Preferred Stock multiplied by (y) the volume weighted average price of our common stock during the 30 consecutive trading day period ending on the trading date immediately prior to the date of such redemption notice or, if calculated in connection with a Deemed Liquidation Event, the value ascribed to a share of our common stock in such Deemed Liquidation Event (the “Redemption Price”). If the holders of Series A Preferred Stock elect to redeem all outstanding shares of Series A Preferred Stock and we have not redeemed all such shares on the applicable date on which the redemption should occur, and such redemption has not been completed on the six month anniversary thereof, the holders of at least a majority of the outstanding shares of Series A Preferred Stock will have the right to initiate, conduct and direct, subject to the approval of our board of directors, a customary sale process regarding the sale of the Company and/or its subsidiaries.
Finally, at any time after the third anniversary of the Original Issuance Date, provided that (i) we are not then in material breach of (or has previously on no more than two occasions materially breached) any of provisions of the Charter, (ii) the terms of any other indebtedness or agreement would not prohibit such redemption, and (iii) we have not previously exercised such redemption right, we may elect to redeem all (but not less than all) shares of Series A Preferred Stock for an amount per share equal to the Redemption Price.
These dividend and redemption payment obligations could significantly impact our liquidity and reduce the amount of our cash flows that are available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes. Our obligations to the holders of Series A Preferred Stock could also limit our ability to obtain additional financing or increase its borrowing costs, which could have an adverse effect on our financial condition. The preferential rights described above could also result in divergent interests between the holders of shares of Series A Preferred Stock and the holders of our common stock.
Any issuance of our common stock upon conversion of the Series A Preferred Stock will cause dilution to then existing Company stockholders and may depress the market price of our common stock.
The Series A Preferred Stock accrues dividends at an initial minimum rate of 7.5% per annum and following the 66-month anniversary of the Original Issuance Date, such dividend rate could increase to as high as 17.5% per annum. Each share of Series A Preferred Stock is convertible, at the option of the holders, into the number of shares of our common stock equal to the quotient (rounded up to the nearest whole number) of (i) the Series A Issue Price, plus any accrued and unpaid dividends, divided by (ii) the Series A Conversion Price, subject to adjustment and certain anti-dilution adjustments. The Series A Conversion Price is initially equal to $7.319.
The issuance of our common stock upon conversion of the Series A Preferred Stock will result in immediate and substantial dilution to the interests of holders of our common stock, and such dilution will increase over time in connection with the accrual of dividends on the Series A Preferred Stock.
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The concentration of common stock ownership among our executive officers and directors could limit the ability of other stockholders of the Company to influence the outcome of corporate transactions or other matters submitted for stockholder approval.
As of March 10, 2022, our executive officers and directors beneficially owned, in the aggregate, 8% of our outstanding common stock, not including 5,563,594 shares of common stock that our executive officers and directors may acquire upon the exercise of outstanding options or if they otherwise acquire additional shares of common stock in the future. As a result, our officers and directors may have the ability to influence the outcome of all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the following actions:
| ● | the election of directors; | |
| ● | adoption of stock option or other equity incentive compensation plans; | |
| ● | the amendment of our organizational documents; and | |
| ● | the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets. |
Future sales of our common stock, including sales of our common stock acquired upon the exercise of outstanding options, may cause the market price of our common stock to decline.
The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or sales of our common stock acquired upon the exercise of outstanding options, or the perception that these sales could occur. These sales also may make it more difficult for us to sell equity securities at a time and price that we deem appropriate.
We have 35,967,442 shares of common stock outstanding as of March 10, 2022, of which 33,263,698 shares are freely transferable without restriction, and 2,703,744 shares are held by our officers and directors and, as such, are subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144 under the Securities Act. In addition, as of December 31, 2021, options to purchase 3,470,000 shares of our common stock were issued and outstanding, of which 1,546,000 were vested. The weighted-average exercise price of the vested stock options is $5.67. We also may issue additional shares of stock in connection with our business, including in connection with acquisitions, and may grant additional stock options to our employees, officers, directors and consultants under our stock option plans or warrants to third parties. If a significant portion of these shares of common stock were sold in the public market, the market value of our common stock could be adversely affected.
The issuance of equity or debt securities under our shelf registration statement could have a negative impact on the price of our common stock.
We have on file a shelf registration statement on Form S-3 that was declared effective by the SEC on November 27, 2019. The shelf registration statement allows us to raise up to an aggregate of $60.0 million from the sale of common stock, preferred stock, warrants, debt securities, and units, or any combination of the foregoing. To date, we have sold, pursuant to the shelf registration statement, an aggregate of 809,846 shares of common stock for approximately $4.2 million of gross proceeds in connection with our ATM Offering and an aggregate of 4,427,500 shares of common stock for gross proceeds of approximately $28.8 million in connection with our Underwritten Public Offering. If we issue all of the remaining available securities included in the shelf registration statement, there could be a substantial dilutive effect on our common stock and an adverse effect on the price of our common stock.
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Our Charter provides that the Court of Chancery of the State of Delaware will be the exclusive forum for certain legal actions between us and our stockholders, which could limit stockholders’ ability to obtain a judicial forum viewed by the stockholders as more favorable for disputes with us or our directors, officers or employees, and the enforceability of the exclusive forum provision may be subject to uncertainty.
Article SIXTEENTH of the Charter provides, subject to certain exceptions enumerated in Article SIXTEENTH, that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for any stockholder to bring (i) any derivative action brought on behalf of the Company, (ii) any action asserting a claim of breach of fiduciary duty owed by any current or former director, officer or other employee or stockholder of the Company, (iii) any action asserting a claim arising pursuant to the General Corporation Law of Delaware (the “DGCL”) or the Charter or our Amended and Restated Bylaws or as to which the DGCL confers jurisdiction on such court, or (iv) any action asserting a claim governed by the internal affairs doctrine, except for, in each of the aforementioned actions, among other things, any claims which are vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery of the State of Delaware or for which the Court of Chancery of the State of Delaware does not have subject matter jurisdiction. Accordingly, the exclusive forum provision will not apply to claims arising under the Securities Act the Exchange Act or other federal securities laws for which there is exclusive federal or concurrent federal and state jurisdiction. Article SIXTEENTH provides that any person or entity who acquires an interest in our capital stock will be deemed to have notice of and consented to the provisions of Article SIXTEENTH. Stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. Although we believe this exclusive forum provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, this exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. Further, in the event a court finds the exclusive forum provision contained in the Charter to be unenforceable or inapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
The Charter contains a provision renouncing our interest and expectancy in certain corporate opportunities which may prevent us from receiving the benefit of certain corporate opportunities.
The “corporate opportunity” doctrine provides that corporate fiduciaries, as part of their duty of loyalty to the corporation and its stockholders, may not take for themselves an opportunity that in fairness should belong to the corporation. As such, a corporate fiduciary may generally not pursue a business opportunity which the corporation is financially able to undertake and which, by its nature, falls into the line of the corporation’s business and is of practical advantage to it, or in which the corporation has an actual or expectant interest, unless the opportunity is disclosed to the corporation and the corporation determines that it is not going to pursue such opportunity. Section 122(17) of the DGCL, however, expressly permits a Delaware corporation to renounce in its certificate of incorporation any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or its officers, directors or stockholders.
Article TWELFTH of the Charter contains a provision that, to the maximum extent permitted under the law of the State of Delaware, the Company renounces any interest or expectancy of the Company in, or in being offered an opportunity to participate in, business opportunities that are from time to time presented to the Series A Directors, any holder of Series A Preferred Stock (or the Company’s common stock issuable upon the conversion of Series A Preferred Stock) or any partner, manager, member, director, officer, stockholder, employee or agent or affiliate of any such holder. Our board of directors believes that this provision, which is intended to provide that certain business opportunities are not subject to the “corporate opportunity” doctrine, is appropriate, as the Investors, who are the initial holders of the Series A Preferred Stock, and their affiliates invest in a wide array of companies, including companies with businesses similar to the Company, and without such assurances, the Investors would be unwilling or unable to enter into the Investment Agreement.
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As a result of this provision, we may be not be offered certain corporate opportunities which could be beneficial to us and our stockholders. While we are unable at this time to predict how this provision may adversely impact our stockholders, it is possible that we would not be offered the opportunity to participate in a future transaction which might have resulted in a financial benefit to us, which could, in turn, result in a material adverse effect on our business, financial condition, results of operations, or prospects.
Provisions of Delaware law or the Charter could delay or prevent an acquisition of the Company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for stockholders to change our management.
The Charter contains provisions that may discourage an unsolicited takeover proposal that stockholders may consider to be in their best interests. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities. These provisions include: the right of the holders of the Series A Preferred Stock to appoint up to two directors; the absence of cumulative voting in the election of directors; the ability of our board of directors to issue up to 50,000 shares of currently undesignated and unissued preferred stock without prior stockholder approval; the consent rights of the holders of Series A Preferred Stock to certain corporate actions and transactions; advance notice requirements for stockholder proposals or nominations of directors; limitations on the ability of stockholders to call special meetings or act by written consent; preemptive rights of the holders of the Series A Preferred Stock to participate in future securities offerings of the Company; the requirement that certain amendments to the Charter be approved by 75% of the voting power of the outstanding shares of our capital stock; and the ability of our board of directors to amend our bylaws without stockholder approval.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are located in Woodcliff Lake, New Jersey. We also have domestic offices in Tampa, Florida and Frisco, Texas. Our New Jersey offices measure approximately 13,899 square feet and is leased space. Our Florida offices consist of approximately 25,000 square feet of leased administrative and warehouse space, and our Texas offices consist of approximately 5,514 square feet of leased administrative space.
We also have international offices located in Rosh Ha’ayin, Israel, Buenos Aires, Argentina, São Paulo, Brazil, Dusseldorf, Germany, Mexico City, Mexico, Cape Town, Midrand, and Durban, South Africa and Oxford, United Kingdom. Our principal offices in Israel consist of approximately 27,000 square feet of leased office space. We also lease a call center and warehouse space and additional smaller facilities and antenna sites in various locations in Israel.
We believe that our existing facilities are adequate for our existing needs.
Item 3. Legal Proceedings.
The information contained in Note 18 to our consolidated financial statements included in this Annual Report on Form 10-K is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the Nasdaq Global Market and the Tel Aviv Stock Exchange, in each case under the symbol “PWFL.”
Holders
As of March 10, 2022, there were 29 holders of record of our common stock.
Dividends
We have never paid a cash dividend on our common stock and do not expect to pay a cash dividend in the near future. We currently intend to retain future earnings, if any, to finance our operations and expand our business.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities.
The following table provides information regarding our share repurchase activity for each month of the quarterly period ended December 31, 2021:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
| October 1, 2021 - October 31, 2021 | 2,000 | $ | 6.65 | (1) | $ | - | $ | - | ||||||||
| November 1, 2021 - November 30, 2021 | 11,000 | $ | 6.83 | (1) | $ | - | $ | - | ||||||||
| December 1, 2021 - December 31, 2021 | 69,000 | $ | 4.75 | (1) | $ | - | $ | - | ||||||||
| Total | 82,000 | $ | 5.07 | $ | - | $ | - | |||||||||
| (1) | Represents shares of common stock withheld to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock. |
Item 6. Reserved.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion is intended to assist you in understanding our financial condition and results of operations and should be read in conjunction with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Many of the amounts and percentages in this section have been rounded for convenience of presentation, but actual recorded amounts have been used in computations. Accordingly, some information may appear not to compute accurately.
Overview
PowerFleet, Inc. (together with its subsidiaries, “PowerFleet,” the “Company,” “we,” “our” or “us”) is a global leader of Internet-of-Things (“IOT”) solutions providing valuable business intelligence for managing high-value enterprise assets that improve operational efficiencies.
We are headquartered in Woodcliff Lake, New Jersey, with offices located around the globe.
Our patented technologies address the needs of organizations to monitor and analyze their assets to improve safety, increase efficiency and productivity, reduce costs, and improve profitability. Our offerings are sold under the global brands PowerFleet, Pointer and Cellocator.
We deliver advanced mobility solutions that connect assets to increase visibility operational efficiency and profitability. Across our vertical markets we differentiate ourselves by being OEM agnostic and helping mixed fleets view and manage their assets similarly. All of our solutions are paired with software as a service, or SaaS, analytics platforms to provide an even deeper layer of insights. These insights include a full set of operational Key Performance Indicators, or KPI’s, to drive operational and strategic decisions. These KPI’s leverage industry comparisons to show how a company is performing versus their peers. The more data the system collects, the more accurate a client’s understanding becomes.
The analytics platform, which is integrated into our customers’ management systems, is designed to provide a single, integrated view of asset and operator activity across multiple locations that provides enterprise-wide benchmarks and peer-industry comparisons. We look for analytics, as well as the data contained therein, to differentiate us from our competitors, make a growing contribution to revenue, and add value to our solutions, and help keep us at the forefront of the wireless asset management markets we serve.
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We sell our wireless mobility solutions to both corporate-level executives, division heads and site-level management within the enterprise. We also utilize channel partners such as independent dealers and original equipment manufacturers, or OEMs, who may opt for us to white label our product. Typically, our initial system deployment serves as a basis for potential expansion across the customer’s organization. We work closely with customers to help maximize the utilization and benefits of our system and demonstrate the value of enterprise-wide deployments. Post-implementation, we consult with our customers to further extend and customize the benefits to the enterprise by delivering enhanced analytics capabilities
We market and sell our solutions to a wide range of customers in the commercial and government sectors. Our customers operate in diverse markets, such as automotive manufacturing, heavy industry, retail food and grocery distribution, logistics, wholesale distribution, transportation, aviation, manufacturing, aerospace and defense, homeland security and vehicle rental.
We incurred net losses of approximately, $12 million, $13.6 million, and $18.1 million for the years ended December 31, 2019, 2020 and 2021, respectively, and have incurred additional net losses since inception. As of December 31, 2021, we had cash (including restricted cash) and cash equivalents of $26.8 million, working capital of $43.6 million, and an accumulated deficit of $134.4 million. Our primary sources of cash are cash flows from operating activities, our holdings of cash, cash equivalents and investments from the sale of our capital stock and borrowings under our credit facility. To date, we have not generated sufficient cash flow solely from operating activities to fund our operations.
Critical Accounting Estimates
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by our management that can have a material impact on the carrying value of certain assets and liabilities. We consider such accounting policies to be our critical accounting policies. The judgments and assumptions used by our management in these critical accounting policies are based on historical experience and other factors that our management believes to be reasonable under the circumstances. Because of the nature of these judgments and assumptions, actual results could differ significantly from these judgments and estimates, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. Our critical accounting policies are described below.
Revenue Recognition
We 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.
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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.
Our 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.
We recognize 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.
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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 names, 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 reportable segment which is its only reporting unit. 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. 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.
Income Taxes
We use 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.
We recognize 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. We apply the “more-likely-than-not” recognition threshold to all tax positions. We have opted to classify interest and penalties that would accrue according to the provisions of relevant tax law as selling, general, and administrative expenses, in the consolidated statement of operations. For the years ended December 31, 2019, 2020 and 2021, interest and penalties were immaterial.
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Results of Operations
The following table sets forth certain items related to our statement of operations as a percentage of revenues for the periods indicated and should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Our results reflect the operations of (i) Pointer Telocation Ltd. from October 3, 2019, the closing date of the transactions pursuant to which we acquired Pointer (the “Transactions”), (ii) the assets we acquired from CarrierWeb Services Ltd. from July 30, 2019, and (iii) the assets we acquired from CarrierWeb, L.L.C from January 30, 2019. A detailed discussion of the material changes in our operating results is set forth below.
| Year Ended December 31, | ||||||||||||
| 2019 | 2020 | 2021 | ||||||||||
| Revenue: | ||||||||||||
| Products | 55.4 | % | 40.2 | % | 42.0 | % | ||||||
| Services | 44.6 | % | 59.8 | % | 58.0 | % | ||||||
| 100.0 | % | 100.0 | % | 100.0 | % | |||||||
| Cost of Revenue: | ||||||||||||
| Cost of products | 36.6 | % | 26.6 | % | 31.2 | % | ||||||
| Cost of services | 16.6 | % | 21.4 | % | 21.1 | % | ||||||
| 53.2 | % | 48.0 | % | 52.3 | % | |||||||
| Gross profit | 46.8 | % | 52.0 | % | 47.7 | % | ||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative expenses | 42.1 | % | 45.7 | % | 45.2 | % | ||||||
| Research and development expenses | 10.4 | % | 9.3 | % | 8.8 | % | ||||||
| Acquisition related expenses | 6.3 | % | 0.0 | % | 0.0 | % | ||||||
| Total operating expenses | 58.8 | % | 55.0 | % | 54.0 | % | ||||||
| Loss from operations | -11.9 | % | -3.0 | % | -6.3 | % | ||||||
| Interest income | 0.2 | % | 0.1 | % | 0.0 | % | ||||||
| Interest expense | -1.7 | % | -3.9 | % | -2.2 | % | ||||||
| Other income (expenses) net, | -0.1 | % | -0.1 | % | 0.0 | % | ||||||
| Net loss before income taxes | -13.5 | % | -7.0 | % | -8.5 | % | ||||||
| Income tax benefit (expense) | 0.1 | % | -0.9 | % | -2.0 | % | ||||||
| Net loss before non-controlling interest | -13.4 | % | -7.9 | % | -10.5 | % | ||||||
| Non-controlling interest | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
| Net loss | -13.4 | % | -7.9 | % | -10.5 | % | ||||||
| Accretion of preferred stock | -0.2 | % | -0.6 | % | -0.5 | % | ||||||
| Preferred stock dividend | -1.1 | % | -3.5 | % | -3.3 | % | ||||||
| Net loss attributable to common shareholders | -14.7 | % | -11.9 | % | -14.3 | % | ||||||
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Year Ended December 31, 2021, Compared to Year Ended December 31, 2020
REVENUES. Revenues increased by approximately $12.6 million, or 11.1%, to $126.2 million in 2021 from $113.6 million in 2020.
Revenues from products increased by approximately $7.3 million, or 16.1%, to $53.0 million in 2021 from $45.7 million in 2020. The increase in product revenue is attributable to an increase in sales by our PowerFleet for Logistics business.
Revenues from services increased by approximately $5.3 million, or 7.8%, to $73.2 million in 2021 from $67.9 million in 2020. The increase in services revenue is principally due to an increase in our install base that generates service revenue.
COST OF REVENUES. Cost of revenues increased by approximately $11.4 million, or 21.0%, to $66.0 million in 2021 from $54.6 million in 2020. Gross profit was $60.2 million in 2021 compared to $59.0 million in 2020. As a percentage of revenues, gross profit decreased to 47.7% in 2021 from 52.0% in 2020. The decrease in gross profit as a percentage of revenue was principally due to changes in product mix and higher costs for components as a result of the global supply chain issues.
Cost of products increased by approximately $9.2 million, or 30.5%, to $39.4 million in 2021 from $30.2 million in 2020. Gross profit for products was $13.5 million in 2021 compared to $15.4 million in 2020. As a percentage of product revenues, gross profit decreased to 25.5% in 2021 from 33.8% in 2020. The decrease in gross profit as a percentage of product revenues was primarily due to a $400,000 one-time expense related to an incentive program to expand business with an existing customer that is one of the largest chassis lessors in North America.. Product gross profit was also impacted by product mix, higher costs associated with supply chain issues, electronic component shortages and inflation.
Cost of services increased by approximately $2.2 million, or 9.1%, to $26.6 million in 2021 from $24.4 million in 2020. Gross profit for services was $46.6 million in 2021 compared to $43.6 million in 2020. As a percentage of service revenues, gross profit decreased to 63.7% in 2021 from 64.2% in 2020.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative (“SG&A”) expenses increased by approximately $5.2 million, or 10.0%, to $57.1 million in 2021 compared to $51.9 million in 2020 principally due to increased salaries due to the reversal of temporary cost reduction initiatives implemented during the first quarter of 2020 in response to the impact and uncertainty caused by COVID-19. There was an additional $1.0 million increase in severance and recruiting related expenses. As a percentage of revenues, SG&A expenses decreased to 45.2% in the year ended December 31, 2021, from 45.7% in the same period in 2020.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development (“R&D”) expenses increased by approximately $0.5 million, or 4.4%, to $11.1 million in 2021 compared to $10.6 million in 2020 principally due to increased salaries due to the reversal of temporary cost reduction initiatives implemented during the first quarter of 2020 in response to the impact and uncertainty caused by COVID-19. As a percentage of revenues, R&D expenses decreased to 8.8% in the year ended December 31, 2021from 9.3% in the same period in 2020.
INTEREST EXPENSE. Interest expense decreased by $1.7 million, or 38.1%, to $2.8 million in 2021 from $4.5 million in 2020, due to the continued paydown of principal on our credit facility with Bank Hapoalim and the full paydown in 2020 of the convertible unsecured promissory notes in the aggregate principal amount of $5,000,000 (the “Notes”) that we issued to ABRY Senior Equity V, L.P., ABRY Senior Equity Co-Investment Fund V, L.P and ABRY Investment Partnership, L.P. (the “Investors” and a decrease in the foreign currency translation losses related to long-term debt included in interest expense.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Net loss attributable to common stockholders was $18.1 million, or $(0.52) per basic and diluted share, for 2021 as compared to net loss of $13.6 million, or $(0.46) per basic and diluted share, for the same period in 2020. The decrease in the net loss was due primarily to the reasons described above.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
REVENUES. Revenues increased by approximately $31.7 million, or 38.7%, to $113.6 million in 2020 from $81.9 million in 2019. The increase in revenue is attributable to a full year of revenue from the Pointer acquisition, which was completed on October 3, 2019, offset by a decrease in revenue in PowerFleet due to the impact COVID-19.
Revenues from products increased by approximately $0.3 million, or 0.5%, to $45.7 million in 2020 from $45.4 million in 2019. The increase in product revenue is attributable to a full year of product revenue from the Pointer acquisition, offset by a decrease in product revenue in PowerFleet due to the impact of COVID-19.
Revenues from services increased by approximately $31.4 million, or 86.1%, to $67.9 million in 2020 from $36.5 million in 2019. The increase in service revenue is attributable to a full year of service revenue resulting from our acquisition of Pointer.
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COST OF REVENUES. Cost of revenues increased by approximately $11.0 million, or 25.3%, to $54.6 million in 2020 from $43.6 million in 2019. Gross profit was $59.0 million in 2020 compared to $38.4 million in 2019. As a percentage of revenues, gross profit increased to 52.0% in 2020 from 46.8% in 2019.
Cost of products increased by approximately $0.2 million, or 0.8%, to $30.2 million in 2020 from $30.0 million in in 2019. Gross profit for products was $15.4 million in 2020 compared to $15.4 million in 2019. As a percentage of product revenues, gross profit decreased to 33.8% in 2020 from 33.9% in 2019.
Cost of services increased by approximately $10.8 million, or 79.5%, to $24.4 million in 2020 from $13.6 million in 2019. Gross profit for services was $43.6 million in 2020 compared to $22.9 million in 2019. The increase in the gross profit was attributable to the increase in service revenue resulting from a full year of operations from our acquisition of Pointer. As a percentage of service revenues, gross profit increased to 64.2% in 2020 from 62.8% in 2019.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative (“SG&A”) expenses increased by approximately $17.4 million, or 50.6%, to $51.9 million in 2020 compared to $34.5 million in 2019. The increase was principally due to our acquisition of Pointer.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by approximately $2.1 million, or 24.1%, to $10.6 million in 2020 compared to $8.5 million in 2019 principally due to our acquisition of Pointer.
ACQUISITION-RELATED EXPENSES. Acquisition related expenses decreased to $-0- in 2020 from approximately $5.1 million in 2019 principally due to the completion of the Transactions in 2019.
INTEREST EXPENSE. Interest expense increased by $3.1 million, or 225.3%, to $4.5 million in 2020 from $1.4 million in 2019, principally due to a full year of our credit facility with Bank Hapoalim and the “Notes” that we issued to the Investors, compared to a partial year of such interest expense in 2019 and an increase in the foreign currency translation losses related to long-term debt included in interest expense.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Net loss attributable to common stockholders was $13.6 million, or $(0.46) per basic and diluted share, for 2020 as compared to net loss of $12.0 million, or $(0.59) per basic and diluted share, for the same period in 2019. The decrease in the net loss was due primarily to the reasons described above
Liquidity and Capital Resources
Historically, our capital requirements have been funded primarily from the net proceeds from the issuance of our securities, including any issuances of our common stock upon the exercise of options. As of December 31, 2021, we had cash (including restricted cash), and cash equivalents of $26.8 million and working capital of $43.6 million, compared to cash (including restricted cash) and cash equivalents of $18.4 million and working capital of $28.9 million as of December 31, 2020.
On October 3, 2019, in connection with the completion of the Transactions, we issued and sold 50,000 shares of the Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), to the Investors pursuant to the terms of an Investment and Transaction Agreement, dated as of March 13, 2019 (as such agreement has been amended from time to time, the “Investment Agreement”) for an aggregate purchase price of $50.0 million. The proceeds received from such sale were used to finance a portion of the cash consideration payable in our acquisition of Pointer.
Also, on October 3, 2019, we issued and sold the Notes to the Investors at the closing of the Transactions. We repaid in full the aggregate principal amount of $5.0 million and accrued interest under the Notes on October 1, 2020.
In addition, our wholly owned subsidiaries, PowerFleet Israel Ltd. (“PowerFleet Israel”) and Pointer (the “Borrowers”) are party to a Credit Agreement (the “Credit Agreement”) with Bank Hapoalim B.M. (“Hapoalim”), pursuant to which Hapoalim agreed to provide PowerFleet Israel with two senior secured term loan facilities in an aggregate principal amount of $30 million (comprised of two facilities in the aggregate principal amount of $20 million (the “Term A Facility”) and $10 million (the “Term B Facility”)) and a five-year revolving credit facility to Pointer in an aggregate principal amount of $10 million (the “Revolving Facility”). The outstanding amount under the term loan facilities was $24,400,000 as of December 31, 2021. The proceeds of the term loan facilities were used to finance a portion of the cash consideration payable in our acquisition of Pointer. The proceeds of the revolving credit facility may be used by Pointer for general corporate purposes.
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On August 23, 2021, the Borrowers entered into an amendment (the “Amendment”), effective as of August 1, 2021, to the Credit Agreement with Hapoalim. The Amendment memorializes the agreements between the Borrowers and Hapoalim regarding a reduction in the interest rates of the Term A Facility and the Term B Facility. Pursuant to the Amendment, commencing as of November 12, 2020, the interest rate with respect to the Term A Facility was reduced to a fixed rate of 3.65% per annum and the interest rate with respect to the Term B Facility was reduced to a fixed rate of 4.5% per annum. The Amendment also provides, among other things, for (i) a reduction in the credit allocation fee on undrawn and uncancelled amounts of the Revolving Facility from 1% to 0.5% per annum, (ii) removal of the requirement that PowerFleet Israel maintain $3,000 on deposit in a separate reserve fund, and (iii) modifications to certain of the affirmative and negative covenants, including a financial covenant regarding the ratio of the Borrowers’ debt levels to Pointer’s EBITDA.
We have 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, we may offer to the public from time to time, in one or more offerings, up to $60.0 million of our common stock, preferred stock, warrants, debt securities, and units, or any combination of the foregoing, at prices and on terms to be determined at the time of any such offering. The specific terms of any future offering will be determined at the time of the offering and described in a prospectus supplement that will be filed with the SEC in connection with such offering.
On May 14, 2020, 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 809,846 shares of common stock for approximately $4.2 million in gross proceeds. We terminated the equity distribution agreement effective as of August 14, 2020.
On February 1, 2021, we closed an underwritten public offering (the “Underwritten Public Offering”) of 4,427,500 shares of common stock (which includes the full exercise of the underwriters’ over-allotment option) for gross proceeds of approximately $28.8 million, before deducting the underwriting discounts and commissions and other estimated offering expenses. The offer and sale of common stock in the ATM Offering and the Underwritten Public Offering were made pursuant to our shelf registration statement.
As a result of the COVID-19 pandemic the related global supply chain disruptions, inflation and other cost increases, there remains uncertainty surrounding the potential impact of such events on our results of operations and cash flows. We are proactively taking steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses and capital expenditures and borrowing under the revolving credit facility.
Capital Requirements
As of December 31, 2021, we had cash (including restricted cash), cash equivalents and marketable securities of $26.8 million and working capital of $43.6 million. Our primary sources of cash are cash flows from operating activities, our holdings of cash, cash equivalents and investments from the sale of our capital stock and borrowings under our credit facility. To date, we have not generated sufficient cash flow solely from operating activities to fund our operations.
We believe our available working capital, anticipated level of future revenues and expected cash flows from operations will provide sufficient funds to cover capital requirements through at least March 16, 2023.
Our capital requirements depend on a variety of factors, including, but not limited to, the length of the sales cycle, the rate of increase or decrease in our existing business base, the success, timing, and amount of investment required to bring new products to market, revenue growth or decline and potential acquisitions. Failure to generate positive cash flow from operations will have a material adverse effect on our business, financial condition and results of operations.
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Operating Activities
Net cash used in operating activities was $5.0 million for the year ended December 31, 2021, compared to net cash provided by operating activities of $8.8 million for the same period in 2020. The net cash used in operating activities for the year ended December 31, 2021, reflects a net loss of $18.1 million and includes non-cash charges of $4.7 million for stock-based compensation, $8.6 million for depreciation and amortization expense and $2.9 million for right of use asset amortization. Changes in working capital items included:
| ● | an increase in accounts receivable of $9.7 million; | |
| ● | an increase in inventory of $6.1 million; and | |
| ● | an increase in accounts payable and accrued expenses of $8.3 million. |
Net cash provided by operating activities was $8.8 million for the year ended December 31, 2020, compared to net cash used in operating activities of $7.3 million for the same period in 2019. The net cash provided by operating activities for the year ended December 31, 2020, reflects a net loss of $13.6 million and includes non-cash charges of $4.6 million for preferred dividends, $4.3 million for stock-based compensation, $8.4 million for depreciation and amortization expense and $2.8 million for right of use asset amortization. Changes in working capital items included:
| ● | a decrease in deferred revenue of $4.3 million; | |
| ● | a decrease in inventory of $3.1 million; and | |
| ● | a decrease in lease liabilities of $3.0 million. |
Investing Activities
Net cash used in investing activities was $3.4 million for the year ended December 31, 2021, compared to net cash used in investing activities of $3.3 million for the same period in 2020. The cash used in investing activities for the year ended December 31, 2021, was for the purchase of fixed assets. The cash used in investing activities in the same period in 2020 was primarily for the purchase of fixed assets.
Net cash used in investing activities was $3.3 million for the year ended December 31, 2020, compared to net cash used in investing activities of $65.5 million for the same period in 2019. The change from the same period in 2019 was primarily due to $-0- used for acquisitions in 2020 compared to $69.0 million used for our acquisitions of Pointer and CarrierWeb in 2019, $3.4 million used for the purchase of fixed assets in 2020 compared to $1 million used for the purchase of fixed assets in 2019 and $-0- provided by the proceeds from the sales and maturities of investments in 2020 compared to $4.6 million in 2019.
Financing Activities
Net cash provided by financing activities was $16.2 million for the year ended December 31, 2021, compared to net cash used in financing activities of $3.9 million for the same period in 2020. The change from the same period in 2020 was primarily due to the net proceeds from our stock offering of $26.9 million offset by the repayment of long-term debt of $5.6 million and the payment of preferred stock dividends of $4.1 million.
Net cash used in financing activities was $3.9 million for the year ended December 31, 2020, compared to net cash provided by financing activities of $78.6 million for the same period in 2019. The change from the same period in 2019 was primarily due to net proceeds from our ATM Offering of $4 million in 2020 compared to net proceeds from our sale of Series A Preferred Stock to the Investors of $46.3 million in 2019, offset by the repayment of the Notes of $5 million and the repayment of long-term debt of $2.9 million.
Inflation
Rising inflation and other macroeconomic conditions in the U.S. have resulted in higher costs of raw materials, freight, and labor, which has impacted our operating costs. In addition, we operate in several emerging market economies that are particularly vulnerable to the impact of inflationary pressures that could materially and adversely impact our operations in the foreseeable future.
Business Acquisitions
In addition to focusing on our core applications, we adapt our systems to meet our customers’ broader asset management needs and seek opportunities to expand our solution offerings through strategic acquisitions.
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On January 30, 2019, we completed the acquisition of substantially all of the assets of CarrierWeb, L.L.C., and on July 30, 2019, we complete the acquisition of substantially all of the assets of CarrierWeb Services Ltd. (together, the “CarrierWeb Acquisitions”). The assets we acquired in the CarrierWeb Acquisitions have been integrated into our products. The CarrierWeb Acquisitions allow us to offer a full complement of highly integrated logistics technology solutions to its current customers and prospects and immediately adds more than 70 customers and 9,000 subscriber units.
On October 3, 2019, we completed the Transactions, as a result of which 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. For further discussion on the Transactions and related transactions, please see Note 3 to our consolidated financial statements included in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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 this standard did not have a material 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 guidance is effective beginning fiscal year 2020. Early adoption is permitted. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
Not applicable.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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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, 2020. 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/ |
|
| We served as the Company’s auditor since 2019. | |
| March 16, 2022 |
| 52 |
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/
March 16, 2022
| 53 |
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 | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net
of allowance for doubtful accounts of $ | ||||||||
| Inventory, net | ||||||||
| Deferred costs - current | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Deferred costs - less current portion | ||||||||
| Fixed assets, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Right of use asset | ||||||||
| Severance payable fund | ||||||||
| Deferred tax asset | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Short-term bank debt and current maturities of long-term debt | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Deferred revenue - current | ||||||||
| Lease liability - current | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, less current maturities | ||||||||
| Deferred revenue - less current portion | ||||||||
| Lease liability - less current portion | ||||||||
| Accrued severance payable | ||||||||
| Deferred tax liability | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (note 21) | - | - | ||||||
| MEZZANINE EQUITY | ||||||||
| Convertible redeemable preferred stock: Series A – shares authorized, $ par value; and shares issued and outstanding at December 31, 2020 and December 31, 2021 | ||||||||
| Preferred stock; authorized shares, $ par value; | - | - | ||||||
| Common stock; authorized shares, $ par value; and shares issued at December 31, 2020 and December 31, 2021, respectively; shares outstanding, and at December 31, 2020 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive gain (loss) | ||||||||
| Treasury stock; and common shares at cost at December 31, 2020 and December 31, 2021, respectively | ( | ) | ( | ) | ||||
| Total Powerfleet, Inc. stockholders’ equity | ||||||||
| Non-controlling interest | ||||||||
| Total equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 54 |
POWERFLEET, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
| Year Ended December 31, | ||||||||||||
| 2019 | 2020 | 2021 | ||||||||||
| Revenues: | ||||||||||||
| Products | $ | $ | $ | |||||||||
| Services | ||||||||||||
| Total revenues | ||||||||||||
| Cost of Revenues: | ||||||||||||
| Cost of products | ||||||||||||
| Cost of services | ||||||||||||
| Total cost of revenue | ||||||||||||
| Gross profit | ||||||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||
| Research and development expenses | ||||||||||||
| Acquisition related expenses | - | - | ||||||||||
| Total Operating expenses | ||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Interest income | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||
| Other (expense) income, net | ( | ) | ( | ) | ||||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||
| Net loss before non-controlling interest | ( | ) | ( | ) | ( | ) | ||||||
| Non-controlling interest | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||
| Accretion of preferred stock | ( | ) | ( | ) | ( | ) | ||||||
| Preferred stock dividends | ( | ) | ( | ) | ( | ) | ||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss per share attributable to common stockholders - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Weighted average common shares outstanding - basic and diluted | ||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 55 |
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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Other comprehensive (loss) income, net: | ||||||||||||
| Unrealized (loss) gain on investments | - | - | ||||||||||
| Reclassification of net realized investment loss (gain) included in net loss | - | - | ||||||||||
| Foreign currency translation adjustment | ( | ) | ||||||||||
| Total other comprehensive income (loss), net | ( | ) | ||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 56 |
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 | | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Net loss attributable to common stockholders | - | - | ( | ) | ( | ) | - | - | - | ( | ) | |||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | |||||||||||||||||||||||||||
| Reclassification of realized losses on investments, net of unrealized amounts | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Shares issued pursuant to Pointer Transactions | - | - | - | - | ||||||||||||||||||||||||||||
| Share based awards assumed Pointer Transaction | - | - | - | - | - | |||||||||||||||||||||||||||
| Shares issued relating to Keytroller acquisition consideration | - | - | - | - | ||||||||||||||||||||||||||||
| Shares issued pursuant to CarrierWeb acquisition | - | - | - | - | ||||||||||||||||||||||||||||
| Shares issued pursuant to exercise of stock options | - | - | - | - | ||||||||||||||||||||||||||||
| Shares withheld pursuant to exercise of stock options | ||||||||||||||||||||||||||||||||
| Issuance of restricted shares | ( | ) | - | - | - | - | - | |||||||||||||||||||||||||
| Forfeiture of restricted shares | ( | ) | - | - | - | - | - | - | ||||||||||||||||||||||||
| Vesting of restricted stock units | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Shares withheld pursuant to vesting of restricted stock | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Common shares issued | ||||||||||||||||||||||||||||||||
| Common shares issued, shares | ||||||||||||||||||||||||||||||||
| Common shares issued, net of issuance costs | ||||||||||||||||||||||||||||||||
| Common shares issued, net of issuance costs,shares | ||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Other | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
| Net loss attributable to common stockholders | - | - | ( | ) | ( | ) | - | - | - | ( | ) | |||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | |||||||||||||||||||||||||||
| Issuance of restricted shares | ( | ) | - | - | - | - | - | |||||||||||||||||||||||||
| Forfeiture of restricted shares | ( | ) | ( | ) | - | - | - | - | - | |||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | - | - | - | - | - | |||||||||||||||||||||||||
| Other | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Shares issued pursuant to exercise of stock options | - | - | - | - | ||||||||||||||||||||||||||||
| Shares withheld pursuant to exercise of stock options | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Shares withheld pursuant to vesting of restricted stock | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Common shares issued | - | - | - | - | ||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net loss attributable to common stockholders | - | - | ( | ) | ( | ) | - | - | - | ( | ) | |||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ( | ) | - | |||||||||||||||||||||||||
| Issuance of restricted shares | ( | ) | - | - | - | - | ||||||||||||||||||||||||||
| Forfeiture of restricted shares | ( | ) | ( | ) | - | - | - | - | - | ( | ) | |||||||||||||||||||||
| Vesting of restricted stock units | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Shares issued pursuant to exercise of stock options | - | - | - | - | ||||||||||||||||||||||||||||
| Shares withheld pursuant to exercise of stock options | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Shares withheld pursuant to vesting of restricted stock | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Common shares issued, net of issuance costs | - | - | - | - | ||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 57 |
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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Adjustments to reconcile net loss to cash (used in) provided by operating activities: | ||||||||||||
| Non-controlling interest | ( | ) | ( | ) | ( | ) | ||||||
| Inventory reserve | ( | ) | ||||||||||
| Stock based compensation expense | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Right-of-use assets, non-cash lease expense | ||||||||||||
| Bad debt expense | ||||||||||||
| Change in contingent consideration | - | - | ||||||||||
| Deferred income taxes | - | |||||||||||
| Other non-cash items | ( | ) | ||||||||||
| Changes in: | ||||||||||||
| Accounts receivable | ( | ) | ( | ) | ||||||||
| Inventory | ( | ) | ( | ) | ||||||||
| Prepaid expenses and other assets | ( | ) | ||||||||||
| Deferred costs | ||||||||||||
| Deferred revenue | ( | ) | ( | ) | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||||||
| Lease liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Accrued severance payable, net | ( | ) | ( | ) | ||||||||
| Net cash (used in) provided by operating activities | ( | ) | ( | ) | ||||||||
| Cash flows from investing activities: | ||||||||||||
| Acquisitions, net of cash assumed | ( | ) | - | - | ||||||||
| Proceeds from sale of property and equipment | - | |||||||||||
| Capital expenditures | ( | ) | ( | ) | ( | ) | ||||||
| Purchases of investments | ( | ) | - | - | ||||||||
| Proceeds from the sale and maturities of investments | - | - | ||||||||||
| Net cash (used in) provided by investing activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Net proceeds from stock offering | ||||||||||||
| Payment of preferred stock dividends | - | - | ( | ) | ||||||||
| Proceeds from convertible note | - | - | ||||||||||
| Repayment of convertible note | - | ( | ) | - | ||||||||
| Proceeds from long-term-debt | - | - | ||||||||||
| Repayment of long-term debt | ( | ) | ( | ) | ( | ) | ||||||
| Debt issuance costs | ( | ) | - | - | ||||||||
| Short-term bank debt, net | ( | ) | ( | ) | ||||||||
| Proceeds from exercise of stock options, net | ||||||||||||
| Purchase of treasury stock upon vesting of restricted stock | ( | ) | ( | ) | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | ||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | ||||||||||||
| Cash, cash equivalents and restricted cash - beginning of period | ||||||||||||
| Cash, cash equivalents and restricted cash - end of period | $ | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents, and restricted cash, beginning of period | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Restricted cash | ||||||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | $ | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents, and restricted cash, end of period | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Restricted cash | ||||||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid for: | ||||||||||||
| Taxes | ||||||||||||
| Interest | ||||||||||||
| Noncash investing and financing activities: | ||||||||||||
| Unrealized (loss) gain on investments | $ | $ | $ | |||||||||
| Value of shares withheld pursuant to exercise of stock options | $ | $ | $ | |||||||||
| Value of shares issued relating to acquisition contingent consideration | $ | $ | $ | |||||||||
| Value of shares issued pursuant to acquisitions | $ | ( | ) | $ | $ | |||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 58 |
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 $
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
$
| 59 |
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 shares of common stock for approximately
$
On
February 1, 2021, the Company closed an underwritten public offering (the “Underwritten Public Offering”) of shares
of common stock (which included the full exercise of the underwriters’ over-allotment option) for gross proceeds of approximately
$
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] :
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
| 60 |
[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 $
[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.
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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:
SCHEDULE OF ESTIMATED USEFUL LIVES OF ASSET
Useful Life (years) | ||
| Computer software | ||
| Installed products | ||
| Computers and electronic equipment | ||
| Furniture and fixtures | ||
| Leasehold improvements |
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[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:
[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 $
[M] Patent costs:
Cost incurred in connection with acquiring patent rights are charged to expense as incurred.
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[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
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
For
the year ended December 31, 2019, one customer accounted for
[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 $, $, and $ 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 | $ | $ | ||||||
[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 $
[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 $
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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 $(
[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 | $ | |||
| Inventory | ||||
| Other assets | ||||
| Customer relationships | ||||
| Trademark and tradename | ||||
| Technology | ||||
| Patents | ||||
| Goodwill (a) | ||||
| Less: Current liabilities assumed | ( | ) | ||
| Less: Non current liabilities assumed | ( | ) | ||
| Net assets acquired | $ |
| (a) |
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 | $ | |||
| Operating loss | $ | ( | ) |
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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 | $ | |||
| Inventory | ||||
| Other assets | ||||
| Customer relationships | ||||
| Trademark and tradename | ||||
| Patents | ||||
| Goodwill (a) | ||||
| Net assets acquired | $ |
| (a) |
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 $
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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 | $ | $ | ||||||
| Operating loss | ( | ( | ) | |||||
| Net loss per share - basic and diluted | $ | ( | ) | $ | ( | ) | ||
| (b) |
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.
SCHEDULE OF REVENUE DISAGGREGATED BY REVENUE SOURCE
| Year Ended December 31, | ||||||||||||
| 2019 | 2020 | 2021 | ||||||||||
| Products | $ | $ | $ | |||||||||
| Services | ||||||||||||
| $ | $ | $ | ||||||||||
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:
SCHEDULE OF DEFERRED REVENUE
| Year Ended December 31, | ||||||||
| 2020 | 2021 | |||||||
| Assets: | ||||||||
| Deferred contract costs | $ | $ | ||||||
| Deferred costs | $ | $ | ||||||
| Liabilities: | ||||||||
| Deferred revenue- services (1) | $ | $ | ||||||
| Deferred revenue - products (1) | ||||||||
| Less: Deferred revenue current portion | ( | ) | ( | ) | ||||
| Deferred revenue long term | $ | $ | ||||||
| (1) |
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NOTE 5 – PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other current assets consist of the following:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| 2020 | 2021 | |||||||
| Year Ended December 31, | ||||||||
| 2020 | 2021 | |||||||
| Finance receivables, current | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Contract assets | ||||||||
| Other current assets | ||||||||
| Prepaid expenses and other current assets | $ | $ | ||||||
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 $
Inventories consist of the following:
SCHEDULE OF INVENTORIES
| 2020 | 2021 | |||||||
| Year Ended December 31, | ||||||||
| 2020 | 2021 | |||||||
| Components | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods, net | ||||||||
| Inventory, Net | $ | $ | ||||||
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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 | $ | $ | ||||||
| Computer software | ||||||||
| Computer and electronic equipment | ||||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
and amortization expense for the years ended December 31, 2019, 2020 and 2021 was $
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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:
SCHEDULE OF INTANGIBLE ASSETS
| December 31, 2021 | Useful Lives (In Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||
| Amortized: | ||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | |||||||||||
| Trademark and tradename | ( | ) | ||||||||||||||
| Patents | ( | ) | ||||||||||||||
| Technology | ( | ) | ||||||||||||||
| Favorable contract interest | ( | ) | ||||||||||||||
| Covenant not to compete | ( | ) | ||||||||||||||
| ( | ) | |||||||||||||||
| Unamortized: | ||||||||||||||||
| Customer List | - | |||||||||||||||
| Trademark and tradename | - | |||||||||||||||
| - | ||||||||||||||||
| Total | $ | $ | ( | ) | $ | |||||||||||
| December 31, 2020 | Useful Lives (In Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||
| Amortized: | ||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | |||||||||||
| Trademark and tradename | ( | ) | ||||||||||||||
| Patents | ( | ) | ||||||||||||||
| Technology | ( | ) | ||||||||||||||
| Favorable contract interest | ( | ) | ||||||||||||||
| Covenant not to compete | ( | ) | ||||||||||||||
| ( | ) | |||||||||||||||
| Unamortized: | ||||||||||||||||
| Customer List | - | |||||||||||||||
| Trademark and tradename | - | |||||||||||||||
| - | ||||||||||||||||
| Total | $ | $ | ( | ) | $ | |||||||||||
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COVID-19 continues to adversely impact the broader global economy and has caused significant volatility in financial markets. If there is a lack of recovery or further global softening in certain markets, or a sustained decline in the value of the Company’s common stock, the Company may conclude that indicators of impairment exist and would then be required to calculate whether or not an impairment exists for its goodwill, other intangibles, and long-lived assets, the results of which could result in material impairment charges. The Company tests goodwill and other indefinite lives intangible assets on an annual basis in the fourth quarter and more frequently if the Company believes indicators of impairment exists. As of December 31, 2020, and 2021, the Company determined that no impairment existed to the goodwill, customer list and trademark and trade name of its acquired intangibles.
At
December 31, 2021, the weighted-average amortization period for the intangible assets was
Amortization
expense for the years ended December 31, 2019, 2020 and 2021 was $
SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS, FUTURE AMORTIZATION EXPENSE
| Year ending December 31: | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Finite-Lived Intangible Assets, Net, Total | $ | |||
The change in goodwill from January 1, 2020 to December 31, 2021 is as follows:
SCHEDULE OF CHANGES IN GOODWILL
| Balance as of January 1, 2020 | $ | |||
| PPA measurement period adjustment (a) | ( | ) | ||
| Balance as of December 31, 2020 | ||||
Other | ||||
| Balance as of December 31, 2021 | $ |
| a) | ||
| b) |
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| December 31, | ||||||||||||
| Basic and diluted loss per share | 2019 | 2020 | 2021 | |||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Weighted-average common share outstanding - basic and diluted | ||||||||||||
| Net loss attributable to common stockholders - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Basic loss per share is calculated by dividing net loss attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution assuming common shares were issued upon the exercise of outstanding options and the proceeds thereof were used to purchase outstanding common shares. Dilutive potential common shares include outstanding stock options, warrants and restricted stock and performance share awards. We include participating securities (unvested share-based payment awards and equivalents that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of preferred stock, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. For the years ended December 31, 2019, 2020 and 2021, the basic and diluted weighted-average shares outstanding are the same, since the effect from the potential exercise of outstanding stock options, conversion of preferred stock and vesting of restricted stock and restricted stock units totaling , and , respectively, would have been anti-dilutive due to the loss.
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The Company’s stockholders have approved the Company’s 2018 Incentive Plan (as amended the “2018 Plan”) pursuant to which the Company may grant stock options, restricted stock and other equity-based awards with respect to up to an aggregate of shares of the Company’s common stock with a vesting period of approximately to . There were shares available for future issuance under the 2018 Plan as of December 31, 2021.
The 2018 Plan is administered by the Compensation Committee of the Company’s Board of Directors, which has the authority to determine, among other things, the term during which an option may be exercised (not more than years), the exercise price of an option and the vesting provisions.
The Company recognizes all employee share-based payments in the statement of operations as an operating expense, based on their fair values on the applicable grant date.
In connection with the Company’s acquisition of Pointer, the Company previously approved the grants of options to purchase shares of the Company’s common stock to Mr. Wolfe and options to purchase shares of the Company’s common stock to Mr. Mavrommatis on March 13, 2019 (the “Signing Bonus Options”) and the grants of additional options to purchase shares of the Company’s common stock to Mr. Wolfe and additional options to purchase shares of the Company’s common stock to Mr. Mavrommatis on October 3, 2019 (the “Closing Bonus Options” and together with the Signing Bonus Options, the “Original Bonus Options”). The Original Bonus Options were subject to the terms of the Company’s 2018 Incentive Plan (the “2018 Plan”), vested upon the attainment of adjusted EBITDA targets for the fiscal years ending December 31, 2020 and December 31, 2021 and became exercisable 180 days after vesting, subject to acceleration in the event of certain change of control transactions. The Signing Bonus Options had an exercise price of $ per share and the Closing Bonus Options had an exercise price of $ per share.
In response to the impact of COVID-19, the Board terminated and cancelled the Original Bonus Options and approved the following grants to replace the Original Bonus Options: (i) options to purchase shares of the Company’s common stock to Mr. Wolfe and options to purchase shares of the Company’s common stock to Mr. Mavrommatis (the “New Signing Options”), which options are subject to the terms of the 2018 Plan, have an exercise price of $ per share, and will , and (ii) options to purchase shares of the Company’s common stock to Mr. Wolfe and options to purchase shares of the Company’s common stock to Mr. Mavrommatis (the “New Closing Options”), which options are subject to the terms of the 2018 Plan, have an exercise price of $ per share, and will
In connection with Mr. David Mahlab’s retirement from his role as the Chief Executive Officer International of the Company, the Company modified the vesting and exercise period of all unvested restricted stock, stock options and restricted stock units previously granted to Mr. Mahlab. Due to the modification of the terms of Mr. Mahlab’s stock options, restricted stock and restricted stock units, the Company recognized additional stock-based compensation expense of $, $-- and $ for the years ended December 31, 2019, December 31, 2020 and December 31, 2021 respectively.
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[A] Stock options:
SCHEDULE OF STOCK OPTIONS ACTIVITY
| 2019 | 2020 | 2021 | ||||||||||||||||||||||
| Number of Shares | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Exercise Price | |||||||||||||||||||
| Outstanding at beginning of year | $ | $ | $ | |||||||||||||||||||||
| Share-based payments assumed | ||||||||||||||||||||||||
| Granted | ||||||||||||||||||||||||
| Exercised | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Forfeited or expired | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Outstanding at end of year | $ | $ | $ | |||||||||||||||||||||
| Exercisable at end of year | $ | $ | $ | |||||||||||||||||||||
SUMMARY OF STOCK OPTION INFORMATION BY EXERCISE PRICE RANGE
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Exercise Prices ($) | Number Outstanding | Weighted - Average Remaining Contractual Life in Years | Weighted- Average Exercise Price | Number Outstanding | Weighted - Average Exercise Price | |||||||||||||||
| - | $ | $ | ||||||||||||||||||
| - | ||||||||||||||||||||
| - | ||||||||||||||||||||
| - | ||||||||||||||||||||
| $ | $ | |||||||||||||||||||
| 77 |
SCHEDULE OF OPTIONS OUTSTANDING AND EXERCISABLE
| As of December 31, 2021 | ||||||||
| Aggregate Intrinsic Value | Weighted - Average Remaining Contractual Life in Years | |||||||
| Options outstanding | $ | |||||||
| Options exercisable | $ | |||||||
SCHEDULE OF FAIR VALUE STOCK OPTION ASSUMPTIONS
| Year Ended December 31, | ||||||||||||
| 2019 | 2020 | 2021 | ||||||||||
| Expected volatility | % | % | % | |||||||||
| Expected life of options | years | years | years | |||||||||
| Risk free interest rate | % | % | % | |||||||||
| Dividend yield | % | % | % | |||||||||
| Weighted-average fair value of options granted during year | $ | $ | $ | |||||||||
Expected volatility is based on historical volatility of the Company’s common stock and the expected life of options is based on historical data with respect to employee exercise periods.
The Company valued the New Signing Options and the New Closing Options market-based performance stock option awards using a Monte Carlo simulation model using a daily price forecast over ten years until expiration utilizing Geometric Brownian Motion that considers a variety of factors including, but not limited to, the Company’s common stock price, risk-free rate (%), and expected stock price volatility (%) over the expected life of awards ( years). The weighted average fair value of options granted during the period was $.
For the years ended December 31, 2019, 2020 and 2021, the Company recorded $, $, and $, respectively, of stock-based compensation expense in connection with the stock option grants.
The fair value of options vested during the years ended December 31, 2019, 2020 and 2021 was $, $, and $, respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, 2020 and 2021 was $, $, and $, respectively.
As of December 31, 2021, there was $ of total unrecognized compensation costs related to non-vested options granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of years.
The Company estimates forfeitures at the time of valuation and reduces expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
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[B] Restricted Stock Awards:
The Company grants restricted stock to employees, whereby the employees are contractually restricted from transferring the shares until they are vested. The stock is unvested at the time of grant and, upon vesting, there are no legal restrictions on the stock. The fair value of each share is based on the Company’s closing stock price on the date of the grant. A summary of the non-vested shares for the years ended December 31, 2019, 2020 and 2021 is as follows:
Number of Non-Vested Shares | Weighted - Average Grant Date Fair Value | |||||||
| Non-vested, at January 1, 2019 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited or expired | ( | ) | ||||||
| Non-vested, at December 31, 2019 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited or expired | ( | ) | ||||||
| Non-vested, at December 31, 2020 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited or expired | ( | ) | ||||||
| Non-vested, at December 31, 2021 | ||||||||
For the years ended December 31, 2019, 2020 and 2021, the Company recorded $, $, and $ respectively, of stock-based compensation expense in connection with the restricted stock grants. As of December 31, 2021, there was $ of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted-average period of years.
[C] Restricted Stock Units:
The Company also grants restricted stock units (“RSUs”) to employees. The following table summarizes the activity relating to the Company’s RSUs for the years ended December 31, 2019, 2020 and 2021:
| Number of Restricted Stock Units | Weighted - Average Grant Date Fair Value | |||||||
| Pointer share-based payments assumed | $ | |||||||
| Vested | ( | ) | ||||||
| Forfeited or expired | ||||||||
| Restricted stock-units, non-vested December 31, 2019 | $ | |||||||
| Vested | ( | ) | ||||||
| Forfeited or expired | ( | ) | ||||||
| Restricted stock-units, non-vested, December 31, 2020 | $ | |||||||
| Vested | ( | ) | ||||||
| Forfeited or expired | ( | ) | ||||||
| Restricted stock-units, non-vested, December 31, 2021 | $ | |||||||
For the years ended December 31, 2019, 2020 and 2021 the Company recorded $, $, and $ respectively, of stock-based compensation expense in connection with the RSUs. As of December 31, 2021, there was $ of total unrecognized compensation cost related to non-vested RSUs. That cost is expected to be recognized over a weighted-average period of years.
NOTE 11 – SHORT-TERM BANK DEBT AND LONG-TERM DEBT
SCHEDULE OF LONG TERM DEBT
| 2020 | 2021 | |||||||
| Year Ended December 31, | ||||||||
| 2020 | 2021 | |||||||
| Short-term bank debt | $ | $ | ||||||
| Current maturities of long-term debt | $ | $ | ||||||
| Long term debt - less current maturities | $ | $ | ||||||
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Long term debt
In
connection with the Transactions, PowerFleet Israel incurred $
The
Credit Facilities will mature on the date that is five years from the Closing Date. The indicative interest rate provided for the Term
Facilities in the original Credit Agreement was approximately
On
August 23, 2021, PowerFleet Israel and Pointer (the “Borrowers”) entered into an amendment (the “Amendment”),
effective as of August 1, 2021, to the Credit Agreement with Hapoalim. The Amendment memorializes the agreements between the Borrowers
and Hapoalim regarding a reduction in the interest rates of the two Term Facilities. Pursuant to the Amendment, commencing as of November
12, 2020, the interest rate with respect to the Term A Facility was reduced to a fixed rate of
In
connection with the Credit Facilities, the Company incurred debt issuance costs of $
Scheduled maturities of the long-term debt as of December 31, 2021, are as follows:
SCHEDULE OF MATURITIES OF LONG TERM DEBT
| Year ending December 31: | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| Long term debt | ||||
| Less: Current Portion | ||||
| Total | $ | |||
The Term B Facility is not subject to amortization over the life of the loan and instead the original principal amount is to be due in one installment on the fifth anniversary of the date of the consummation of the Transactions.
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NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| 2020 | 2021 | |||||||
| Year Ended December 31, | ||||||||
| 2020 | 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued warranty | ||||||||
| Accrued compensation | ||||||||
| Government authorities | ||||||||
| Other current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
The following table summarizes warranty activity during the years ended December 31, 2020 and 2021:
SCHEDULE OF PRODUCT WARRANTY LIABILITY
| Year Ended December 31, | ||||||||
| 2020 | 2021 | |||||||
| Accrued warranty reserve, beginning of year | $ | $ | ||||||
| Accrual for product warranties issued | ||||||||
| Product replacements and other warranty expenditures | ( | ) | ( | ) | ||||
| Expiration of warranties | ( | ) | ( | ) | ||||
| Accrued warranty reserve, end of period (a) | $ | $ | ||||||
| (a) |
NOTE 13 - LEASES
The
Company has operating leases for office space and office equipment. The Company’s leases have remaining lease terms of
The Company has lease agreements which are classified as short-term in nature. These leases meet the criteria for operating lease classification. Lease cost associated with the short-term leases are included in selling, general and administrative expenses on the Company’s condensed consolidated statements of operations during years ended December 31, 2019, 2020, and 2021.
Components of lease expense are as follows:
SCHEDULE OF COMPONENTS OF LEASE EXPENSE
Year Ended December 31, 2020 | Year Ended December 31, 2021 | |||||||
| Short term lease cost: | $ | $ | ||||||
Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows:
SCHEDULE OF CASH FLOW INFORMATION AND NON-CASH ACTIVITY OF OPERATING LEASES
Year Ended December 31, 2020 | Year Ended December 31, 2021 | |||||||
| Non-cash activity: | ||||||||
| Right-of-use assets obtained in exchange for lease obligations | $ | $ | ||||||
Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows:
SCHEDULE OF WEIGHTED AVERAGE REMAINING LEASE TERM AND DISCOUNT RATE
| December 31, 2021 | ||||
| Weighted-average remaining lease term (in years) | ||||
| Weighted-average discount rate | % | |||
| 81 |
Scheduled maturities of operating lease liabilities outstanding as of December 31, 2021 are as follows:
SCHEDULED MATURITIES OF OPERATING LEASE LIABILITIES
| Year ending December 31: | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
NOTE 14 - STOCKHOLDERS’ EQUITY
[A] Public Offering:
On
February 1, 2021 the Company closed an underwritten public offering of shares of common stock (which included the full exercise
of the underwriters’ over-allotment option) for gross proceeds of approximately $
[B] ATM Offering:
On
May 14, 2020, we entered into an equity distribution agreement (the “Sales Agreement”) with Canaccord, pursuant to which
we could offer and sell, from time to time through an “at-the-market offering” program, with Canaccord as sales agent,
shares of our common stock having an aggregate offering price of up to $ |
[C] Redeemable Preferred stock:
The Company is authorized to issue shares of preferred stock, par value $ per share of which shares are designated Series A Preferred Stock and shares are undesignated.
Series A Preferred Stock
In connection with the completion of the Transactions, on October 3, 2019, the Company issued shares of Series A Preferred Stock to ABRY Senior Equity V, L.P., ABRY Senior Equity Co-Investment Fund V, L.P and ABRY Investment Partnership, L.P. (the “Investors”). For the year ended December 31, 2020, and December 31, 2021, the Company issued and -- additional shares of Series A Preferred Stock.
Liquidation
Dividends
Holders
of Series A Preferred Stock are entitled to receive cumulative dividends at a minimum rate of |
| 82 |
Voting; Consent Rights
The
holders of Series A Preferred Stock will be given notice by the Company of any meeting of stockholders or action to be taken by written
consent in lieu of a meeting of stockholders as to which the holders of common stock are given notice at the same time as provided
in, and in accordance with, the Company’s Amended and Restated Bylaws. Except as required by applicable law or as otherwise
specifically set forth in the Charter, the holders of Series A Preferred Stock are not entitled to vote on any matter presented to
the Company’s stockholders unless and until any holder of Series A Preferred Stock provides written notification to the Company
that such holder is electing, on behalf of all holders of Series A Preferred Stock, to activate their voting rights and in doing
so rendering the Series A Preferred Stock voting capital stock of the Company (such notice, a “Series A Voting Activation Notice”).
Redemption
At
any time, each holder of Series A Preferred Stock may elect to convert each share of such holder’s then-outstanding Series
A Preferred Stock into the number of shares of the Company’s common stock equal to the quotient of (x) the Series A Issue Price,
plus any accrued and unpaid dividends, divided by (y) the Series A Conversion Price in effect at the time of conversion. The Series
A Conversion Price is initially equal to $
Further, at any time (i) after the 66-month anniversary of the Original Issuance Date, (ii) following delivery of a mandatory conversion notice by us, or (iii) upon a deemed liquidation event, subject to Delaware law governing distributions to stockholders, the holders of the Series A Preferred Stock may elect to require us to redeem all or any portion of the outstanding shares of Series A Preferred Stock for an amount per share equal to the Redemption Price.
On June 9, 2021, the Company entered into a preferred stock redemption right agreement (the “Redemption Right Agreement”) with the Investors, pursuant to which the Company had the right to redeem shares of Series A Preferred Stock at a price of $ per share plus all accrued and unpaid dividends, to be paid in cash. The Company did not exercise its redemption right and the Redemption Right Agreement automatically terminated on October 1, 2021. |
| 83 |
NOTE 15 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net loss and unrealized gains or losses on available-for-sale investments and foreign currency translation gains and losses. Cumulative unrealized gains and losses on available-for-sale investments are reflected as accumulated other comprehensive loss in stockholders’ equity on the Company’s Consolidated Balance Sheets.
The accumulated balances for each classification of other comprehensive income (loss) are as follows:
SCHEDULE OF ACCUMULATED OTHER COMPREHENSIVE LOSS
| Foreign currency translation adjustment | Unrealized gain (losses) on investments | Accumulated other comprehensive income | ||||||||||
| Balance at January 1, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net current period change | ||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | |||||||||
| Net current period change | ||||||||||||
| Balance at December 31, 2020 | ||||||||||||
| Net current period change | ( | ) | ( | ) | ||||||||
| Balance at December 31, 2021 | $ | $ | $ | |||||||||
NOTE 16 – SEGMENT INFORMATION
The Company operates in one reportable segment, wireless IoT asset management. The following table summarizes revenues on a percentage basis by geographic region.
SCHEDULE OF REVENUES AND LONG LIVED ASSETS BY GEOGRAPHICAL REGION
| Year Ended December 31, | ||||||||||||
| 2019 | 2020 | 2021 | ||||||||||
| United States | $ | $ | $ | |||||||||
| Israel | ||||||||||||
| Other | ||||||||||||
| $ | $ | $ | ||||||||||
| Year Ended December 31, | ||||||||||||
| 2019 | 2020 | 2021 | ||||||||||
| Long lived assets by geographic region: | ||||||||||||
| United States | $ | $ | $ | |||||||||
| Israel | ||||||||||||
| Other | ||||||||||||
| $ | $ | $ | ||||||||||
| 84 |
NOTE 17 - INCOME TAXES
Loss before income taxes consists of the following:
SCHEDULE OF LOSS BEFORE INCOME TAXES
| 2019 | 2020 | 2021 | ||||||||||
| Year Ended December 31, | ||||||||||||
| 2019 | 2020 | 2021 | ||||||||||
| U.S. operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Foreign operations | ( | ) | ||||||||||
| Net loss before income tax | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
The provision for income taxes consist of the following:
SCHEDULE OF PROVISION FOR INCOME TAXES
| 2019 | 2020 | 2021 | ||||||||||
| Year Ended December 31, | ||||||||||||
| 2019 | 2020 | 2021 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | $ | $ | |||||||||
| State | ||||||||||||
| Foreign | ( | ) | ||||||||||
| 75 | 99 | 143 | ||||||||||
| Deferred: | ||||||||||||
| Federal | - | - | - | |||||||||
| State | - | - | - | |||||||||
| Foreign | - | |||||||||||
| - | 939 | 2,464 | ||||||||||
| Total (benefit) provision for income taxes | $ | $ | $ | |||||||||
The difference between income taxes at the statutory federal income tax rate and income taxes reported in the Consolidated Statements of Operations is attributable to the following:
SCHEDULE OF STATUTORY FEDERAL INCOME TAX RATE
| 2019 | 2020 | 2021 | ||||||||||
| Year Ended December 31, | ||||||||||||
| 2019 | 2020 | 2021 | ||||||||||
| Income tax benefit at the federal statutory rate | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| State and local income taxes, net of federal taxes | ( | ) | ( | ) | ||||||||
| Increase (decrease) in valuation allowance | ( | ) | ||||||||||
| Remeasurement of deferred tax adjustments | ( | ) | ||||||||||
| Permanent differences and other | ||||||||||||
| Foreign rate differential | ( | ) | ( | ) | ||||||||
| GILTI inclusion | - | |||||||||||
| Other | ( | ) | ||||||||||
| Income tax benefit | $ | ( | ) | $ | $ | |||||||
| 85 |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2021 are presented below:
SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES
| 2020 | 2021 | |||||||
| Year Ended December 31, | ||||||||
| 2020 | 2021 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Capital loss carryforwards | ||||||||
| Deferred revenue | ||||||||
| Stock-based compensation | ||||||||
| Federal research and development tax credits | ||||||||
| Intangibles, amortization | - | |||||||
| Inventories | ||||||||
| Bad Debt Reserve | ||||||||
| Deferred lease liability | ||||||||
| Other deductible temporary differences | ||||||||
| Total gross deferred tax assets | ||||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net of valuation allowance | ||||||||
| Deferred tax liabilities: | ||||||||
| Intangible amortization | ( | ) | ( | ) | ||||
| ROU assets | ( | ) | ( | ) | ||||
| Fixed assets, depreciation | ( | ) | - | |||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Net deferred tax (liabilities)/assets | $ | $ | ( | ) | ||||
A reconciliation of the beginning and ending amount of unrecognized tax positions is as follows:
SCHEDULE OF UNRECOGNIZED TAX POSITIONS
| 2020 | 2021 | |||||||
| Year Ended December 31, | ||||||||
| 2020 | 2021 | |||||||
| Balance at the beginning of the year | $ | $ | ||||||
| Additions based on tax provisions taken related to current year | ||||||||
| Balance at the end of year | $ | $ | ||||||
The unrecognized tax benefits, if recognized, would reduce the Company’s annual effective tax rate. The Company does not expect any significant changes to its unrecognized tax positions during the next twelve months.
At
December 31, 2021, the Company had an aggregate net operating loss carryforward of approximately $
| 86 |
At
December 31, 2021, the Company has New Jersey net operating loss carryforwards (“NJ NOLs”) included above in the approximate
amount of $
The Company is asserting permanent reinvestment of all accumulated undistributed earnings of its foreign subsidiaries as of December 31, 2021 in excess of annual debt service costs requirements.
For
the year ended December 31, 2021, the Company’s valuation allowance decreased to $
Audits for federal income tax returns are closed for the years through 2017. However, the Internal Revenue Service (“IRS”) can audit the NOL’s generated during those years in the years that the NOL’s are utilized. State income tax returns are generally subject to examination for a period of three to six years after the filing of the respective tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Foreign income tax returns are generally subject to examination based on the tax laws of the respective jurisdictions.
| 87 |
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Except for normal operating leases, the Company is not currently subject to any material commitments.
[A] Contingencies:
Except for normal operating leases, the Company is not currently subject to any material commitments.
From time to time, the Company is involved in various litigation matters involving claims incidental to its business and acquisitions, including employment matters, acquisition related claims, patent infringement and contractual matters, among other issues. While the outcome of any such litigation matters cannot be predicted with certainty, management currently believes that the outcome of these proceedings, including the matters described below, either individually or in the aggregate, will not have a material adverse effect on its business, results of operations or financial condition. The Company records reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable.
In
August 2014, Pointer do Brasil Comercial Ltda. (“Pointer Brazil”) received a notification of lack of payment of VAT tax (Brazilian
ICMS tax) in the amount of $
In
July 2015, Pointer Brazil received a tax deficiency notice alleging that the services provided by Pointer Brazil should be classified
as “telecommunication services” and therefore Pointer Brazil should be subject to the state value-added tax. The aggregate
amount claimed to be owed under the notice was approximately $
NOTE 19 – SUBSEQUENT EVENTS
Effective January 5, 2022, Steve Towe was appointed as the new Chief Executive Officer, succeeding Chris Wolfe.
| 88 |
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.
As of December 31, 2021, we carried out an evaluation, with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective, as of December 31, 2021.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of December 31, 2021, of our internal control over financial reporting based on the framework in 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was not effective as of December 31, 2021 due to a material weakness in our internal control over financial reporting described below.
A material weakness is a deficiency, or a 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. Management has concluded that a material weakness existed as of December 31, 2021, with respect to its Israel component:
| ● | Controls were not designed, documented, and maintained to ensure accurate reporting of results in Israel including (i) insufficient design and operating effectiveness of management review controls including the appropriate level of precision required to mitigate the potential for a material misstatement, (ii) insufficient documentation evidencing management’s review to support the financial statement close process and (iii) inadequate verification for completeness and accuracy of key reports. |
The material weakness did not result in any restatements of consolidated financial statements previously reported by us, there were no changes in previously released financial results and management concluded that the consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented, in conformity with accounting principles generally accepted in the United States.
We have begun to develop remediation plans for the material weakness as described below:
| ● | Utilizing external resources to support its efforts to rework certain control gaps across the various processes in Israel with identified deficiencies | |
| ● | Implementing enhanced documentation associated with management review controls and validation of the completeness and accuracy of key reports in Israel | |
| ● | Training of relevant personnel reinforcing existing policies and enhanced policies with regards to the appropriate steps and procedures required to be performed related to the execution and documentation of internal controls |
Our independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on Form 10-K, Ernst & Young LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting which appears in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There was no change in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
| 89 |
PART III.
Item 10. Directors, Executive Officers and Corporate Governance.
The Company incorporates by reference herein information to be set forth in its definitive proxy statement for its 2022 annual meeting of stockholders that is responsive to the information required with respect to this Item 10; provided, however, that such information shall not be incorporated herein:
| ● | if the information that is responsive to the information required with respect to this Item 10 is provided by means of an amendment to this Annual Report on Form 10-K filed with the SEC prior to the filing of such definitive proxy statement; or | |
| ● | if such proxy statement is not filed with the SEC within 120 days after the end of the Company’s most recently completed fiscal year, in which case the Company will provide such information by means of an amendment to this Annual Report on Form 10-K filed with the SEC within such 120-day period. |
Item 11. Executive Compensation.
The Company incorporates by reference herein information to be set forth in its definitive proxy statement for its 2022 annual meeting of stockholders that is responsive to the information required with respect to this Item 11; provided, however, that such information shall not be incorporated herein:
| ● | if the information that is responsive to the information required with respect to this Item 11 is provided by means of an amendment to this Annual Report on Form 10-K filed with the SEC prior to the filing of such definitive proxy statement; or | |
| ● | if such proxy statement is not filed with the SEC within 120 days after the end of the Company’s most recently completed fiscal year, in which case the Company will provide such information by means of an amendment to this Annual Report on Form 10-K filed with the SEC. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The Company incorporates by reference herein information to be set forth in its definitive proxy statement for its 2022 annual meeting of stockholders that is responsive to the information required with respect to this Item 12; provided, however, that such information shall not be incorporated herein:
| ● | if the information that is responsive to the information required with respect to this Item 12 is provided by means of an amendment to this Annual Report on Form 10-K filed with the SEC prior to the filing of such definitive proxy statement; or | |
| ● | if such proxy statement is not filed with the SEC within 120 days after the end of the Company’s most recently completed fiscal year, in which case the Company will provide such information by means of an amendment to this Annual Report on Form 10-K filed with the SEC within such 120-day period. |
| 90 |
Securities Authorized for Issuance Under Equity Compensation Plans.
The following table provides certain information with respect to the Company’s equity compensation plans in effect as of December 31, 2021:
EQUITY COMPENSATION PLAN INFORMATION
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding option, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected under (a)) | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
| Equity compensation plans approved by security holders (1) | 3,470,000 | $ | 5.91 | 2,163,000 | ||||||||
| Total | 3,470,000 | $ | 5.91 | 2,163,000 | ||||||||
| (1) | These plans consist of the PowerFleet, Inc. 2018 Incentive Plan, the 2015 Equity Compensation Plan, the 2009 Non-Employee Director Equity Compensation Plan which were our only equity compensation plans under which awards were outstanding as of December 31, 2021. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Company incorporates by reference herein information to be set forth in its definitive proxy statement for its 2022 annual meeting of stockholders that is responsive to the information required with respect to this Item 13; provided, however, that such information shall not be incorporated herein:
| ● | if the information that is responsive to the information required with respect to this Item 13 is provided by means of an amendment to this Annual Report on Form 10-K filed with the SEC prior to the filing of such definitive proxy statement; or | |
| ● | if such proxy statement is not filed with the SEC within 120 days after the end of the Company’s most recently completed fiscal year, in which case the Company will provide such information by means of an amendment to this Annual Report on Form 10-K filed with the SEC within such 120-day period. |
Item 14. Principal Accounting Fees and Services.
The Company incorporates by reference herein information to be set forth in its definitive proxy statement for its 2022 annual meeting of stockholders that is responsive to the information required with respect to this Item 14; provided, however, that such information shall not be incorporated herein:
| ● | if the information that is responsive to the information required with respect to this Item 14 is provided by means of an amendment to this Annual Report on Form 10-K filed with the SEC prior to the filing of such definitive proxy statement; or | |
| ● | if such proxy statement is not filed with the SEC within 120 days after the end of the Company’s most recently completed fiscal year, in which case the Company will provide such information by means of an amendment to this Annual Report on Form 10-K filed with the SEC within such 120-day period. |
| 91 |
PART IV.
Item 15. Exhibits, Financial Statement Schedules.
(a) List of Financial Statements, Financial Statement Schedules, and Exhibits.
(1) Financial Statements. The following financial statements of PowerFleet, Inc. are included in Item 8 of Part II of this Annual Report on Form 10-K:
(2) Financial Statement Schedule.
None.
| 92 |
(3) Exhibits. The following exhibits are filed with this Annual Report on Form 10-K or are incorporated herein by reference, as indicated.
| 93 |
| 94 |
| 95 |
| † | We have omitted certain schedules and exhibits to this agreement in accordance with Item 601(b)(2) of Regulation S-K, and we will supplementally furnish a copy of any omitted schedule and/or exhibit to the Securities and Exchange Commission upon request. |
| * | Management contract or compensatory plan or arrangement. |
(b) Exhibits. The exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference. Please see the Index to Exhibits to this Annual Report on Form 10-K, which is incorporated into this Item 15(b) by reference.
Item 16. Form 10-K Summary
None.
| 96 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 2022
| POWERFLEET, INC. | ||
| By: | /s/ Steve Towe | |
| Steve Towe | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ Ned Mavrommatis | |
| Ned Mavrommatis | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Steve Towe | Chief Executive Officer | March 16, 2022 | ||
| Steve Towe | (Principal Executive Officer) | |||
| /s/ Ned Mavrommatis | Chief Financial Officer | March 16, 2022 | ||
| Ned Mavrommatis | (Principal Financial and Accounting Officer) | |||
| /s/ Anders Bjork | Director | March 16, 2022 | ||
| Anders Bjork | ||||
| /s/ Michael Brodsky | Director | March 16, 2022 | ||
| Michael Brodsky | ||||
| /s/ Michael Casey | Director | March 16, 2022 | ||
| Michael Casey | ||||
| /s/ Charles Frumberg | Director | March 16, 2022 | ||
| Charles Frumberg | ||||
| /s/ David Mahlab | Director | March 16, 2022 | ||
| David Mahlab | ||||
| /s/ Medhini Srinivasan | Director | March 16, 2022 | ||
| Medhini Srinivasan |
| 97 |
Exhibit 21.1
POWERFLEET, INC.
LIST OF SUBSIDIARIES
| Name | Jurisdiction of Formation | |
| I.D. Systems, Inc. | Delaware | |
| Asset Intelligence, LLC | Delaware | |
| Keytroller, LLC | Delaware | |
| PowerFleet GmbH | Germany | |
| PowerFleet Systems Ltd | United Kingdom | |
| PowerFleet Israel Ltd. | Israel | |
| Pointer Telocation Ltd. | Israel | |
| Pointer Argentina S.A. (1) | Argentina | |
| Pointer Recuperación de México, S.A. de C.V. (2) | Mexico | |
| Pointer Logistica y Monitoreo, S.A. de C.V. (2) | Mexico | |
| Pointer do Brasil Comercial Ltda. | Brazil | |
| Pointer Telocation India | India | |
| Pointer SA (PTY) Ltd. (3) | South Africa |
| (1) | The Company indirectly holds 99.64% of the issued and outstanding shares of Pointer Argentina S.A. |
| (2) | The Company indirectly holds 99.99% of the issued and outstanding capital stock of Pointer Recuperación de México, S.A. de C.V. and Pointer Logistica y Monitoreo, S.A. de C.V. |
| (3) | The Company indirectly holds 88% of the issued and outstanding shares of Pointer SA (PTY) Ltd. |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
| (1) | Registration Statement on Form S-3 (No. 333-234703) of PowerFleet, Inc. | |
| (2) | Registration Statement on Form S-8 (No. 333-234079) pertaining to the PowerFleet, Inc. 2018 Incentive Plan, I.D. Systems, Inc. 2015 Equity Compensation Plan, I.D. Systems, Inc. 2009 Non-Employee Director Equity Compensation Plan and I.D. Systems, Inc. 2007 Equity Compensation Plan | |
| (3) | Registration Statement on Form S-8 (No. 333-234081) pertaining to the I.D. Systems, Inc. 401(k) Plan and | |
| (4) | Registration Statement on Form S-8 (No. 333-258715) pertaining to the PowerFleet, Inc. 2018 Incentive Plan; | |
| of our report dated March 16, 2022, with respect to the consolidated financial statements of PowerFleet, Inc. and the effectiveness of internal control over financial reporting of PowerFleet, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2021. |
| /s/ Ernst & Young LLP | |
| Iselin, New Jersey | |
| March 16, 2022 |
Exhibit 31.1
CERTIFICATIONS
I, Steve Towe, as Chief Executive Officer (Principal Executive Officer), certify that:
1. I have reviewed this Annual Report on Form 10-K of PowerFleet, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: March 16, 2022 | By: | /s/ Steve Towe |
| Name: | Steve Towe | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Ned Mavrommatis, as Chief Financial Officer (Principal Financial Officer), certify that:
1. I have reviewed this Annual Report on Form 10-K of PowerFleet, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: March 16, 2022 | By: | /s/ Ned Mavrommatis |
| Name: | Ned Mavrommatis | |
| Title: | Chief Financial Officer | |
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K (the “Report”) of PowerFleet, Inc. (the “Corporation”) for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof, I, Steve Towe, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
| Dated: March 16, 2022 | By: | /s/ Steve Towe |
| Name: | Steve Towe | |
| Title: | Chief Executive Officer |
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Corporation and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K (the “Report”) of PowerFleet, Inc. (the “Corporation”) for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof, I, Ned Mavrommatis, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
| Date: March 16, 2022 | By: | /s/ Ned Mavrommatis |
| Name: | Ned Mavrommatis | |
| Title: | Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Corporation and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its staff upon request.