PowerFleet(PWFL) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements PowerFleet's unaudited condensed consolidated financial statements for Q3 2023 detail financial position, performance, and cash flows Condensed Consolidated Balance Sheets PowerFleet's balance sheet as of September 30, 2023, shows slight decreases in total assets and equity, with cash increasing Condensed Balance Sheet Summary (in thousands) | Account | Dec 31, 2022 | Sep 30, 2023 (Unaudited) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $17,680 | $19,297 | | Total current assets | $81,225 | $83,180 | | Goodwill | $83,487 | $83,487 | | Total assets | $217,435 | $216,106 | | Liabilities & Equity | | | | Total current liabilities | $45,714 | $48,633 | | Total liabilities | $77,055 | $76,543 | | Total stockholders' equity | $82,815 | $80,387 | | Total liabilities and stockholders' equity | $217,435 | $216,106 | Condensed Consolidated Statements of Operations Q3 2023 operations show flat revenues and a wider net loss, with a nine-month bargain purchase gain reducing the overall net loss Q3 Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2022 | Q3 2023 | | :--- | :--- | :--- | | Total revenues | $34,288 | $34,195 | | Gross profit | $17,181 | $17,115 | | Loss from operations | $(1,218) | $(3,257) | | Net loss | $(2,300) | $(3,674) | | Net loss attributable to common stockholders | $(3,535) | $(4,969) | | Net loss per share - basic & diluted | $(0.10) | $(0.14) | Nine Months Ended Sep 30 Statement of Operations Highlights (in thousands) | Metric | 2022 | 2023 | | :--- | :--- | :--- | | Total revenues | $102,043 | $99,084 | | Gross profit | $47,810 | $49,767 | | Loss from operations | $(6,548) | $(8,281) | | Gain on bargain purchase - Movingdots | - | $7,517 | | Net loss | $(5,347) | $(1,882) | | Net loss attributable to common stockholders | $(8,994) | $(5,749) | Condensed Consolidated Statements of Cash Flows Nine-month cash flows show improved operating cash usage, positive investing cash from Movingdots acquisition, and increased financing cash usage Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2022 | 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,714) | $(232) | | Net cash (used in) provided by investing activities | $(4,001) | $3,269 | | Net cash used in financing activities | $(523) | $(1,349) | | Net (decrease) increase in cash | $(9,748) | $1,618 | - The primary driver for positive cash flow from investing activities was the $8.7 million in cash assumed from the Movingdots acquisition[24] Notes to Unaudited Condensed Consolidated Financial Statements Notes detail the Movingdots acquisition gain, revenue recognition, debt, and the subsequent agreement to acquire MiX Telematics - On March 31, 2023, the Company acquired Movingdots GmbH. The fair value of identifiable net assets acquired ($8.86 million) exceeded the purchase consideration ($1.35 million), resulting in a gain on bargain purchase of approximately $7.5 million[41][47][48] - On October 10, 2023, the Company entered into an agreement to acquire MiX Telematics Limited, which will become an indirect, wholly-owned subsidiary, with the transaction expected to close in the first quarter of 2024[138][149] - The company has incurred recurring losses and had an accumulated deficit of $143.3 million as of September 30, 2023, though management believes current cash and future cash generation are sufficient to fund operations for at least the next 12 months[37][39] Revenue by Source (in thousands) | Revenue Source | Q3 2022 | Q3 2023 | Nine Months 2022 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Products | $14,021 | $13,147 | $43,231 | $36,563 | | Services | $20,267 | $21,048 | $58,812 | $62,521 | | Total | $34,288 | $34,195 | $102,043 | $99,084 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A discusses flat Q3 revenues, increased net loss from SG&A, sufficient liquidity, and the Movingdots acquisition with the pending MiX Telematics deal Results of Operations Q3 2023 operations show a slight revenue decrease, with product sales down and service revenue up, leading to a wider net loss from increased SG&A - Q3 2023 product revenue decreased by $0.9 million (6.2%) primarily due to reduced sales in Germany and Israel, reflecting strategic business decisions and geopolitical factors[195] - Q3 2023 service revenue increased by $0.8 million (3.8%) due to growth in the installed base generating recurring revenue[196] - Q3 2023 SG&A expenses rose by $1.3 million (7.9%), driven by $1.2 million in transaction costs for the MiX Telematics deal and $0.7 million in expenses from the newly acquired Movingdots[200] - For the nine months ended Sep 30, 2023, net loss attributable to common stockholders decreased to $5.7 million from $9.0 million in the prior year, primarily due to the gain on bargain purchase for Movingdots and lower interest expense[212] Liquidity and Capital Resources As of September 30, 2023, the company had $19.6 million in cash and $34.5 million in working capital, with sufficient liquidity for 12 months and a new $30 million debt facility approved - As of September 30, 2023, the company had cash and cash equivalents of $19.6 million and working capital of $34.5 million[213][224] - The company has received credit committee approval from its existing lender, Hapoalim, for a new 5-year term debt facility of approximately $30 million[188][228] - The pending acquisition of MiX Telematics requires the company to obtain financing to redeem all outstanding Series A Convertible Preferred Stock[186][226] - Management believes current cash and projected cash from operations are sufficient to fund the company for at least the next 12 months from the report's issuance date[189][229] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable for the period, indicating no material changes to market risk exposures since the last annual report - The company has indicated that there are no applicable quantitative and qualitative disclosures about market risk for this period[245] Controls and Procedures Internal control over financial reporting was ineffective as of December 31, 2022, due to material weaknesses in revenue allocation, software capitalization, and financial close processes - Management concluded that internal control over financial reporting was not effective as of December 31, 2022, and these weaknesses have not been remediated as of September 30, 2023[247] - Material weaknesses were identified in three areas: determining standalone selling prices (SSP) for revenue allocation, capitalizing costs for internal-use software, and controls over the financial statement close process[248][249] - Remediation steps include implementing a new ERP system, utilizing external resources, enhancing documentation for management review, and training personnel[250][254] PART II - OTHER INFORMATION Legal Proceedings The company faces various litigation, including two Brazilian tax disputes with potential exposures of $1.3 million and $12.9 million, where a loss is not probable - The company is defending a tax assessment in Brazil from August 2014 regarding VAT tax, with a total potential exposure of $1.33 million as of September 30, 2023, where legal counsel believes a loss is not probable[133] - A second tax dispute in Brazil from July 2015 alleges services should be classified as "telecommunication services," with an initial claim of approximately $12.9 million, which a favorable lower court ruling reduced to $218,000, now under appeal by the state, and counsel believes a loss is not probable[134] Risk Factors Updated risk factors highlight potential adverse effects from the political, military, and economic conditions in Israel, including reservist call-ups and operational disruptions - A new risk factor has been added concerning the company's operations in Israel due to the political, military, and economic conditions, specifically citing the conflict that began on October 7, 2023[257][258] - The conflict has resulted in the call-up of Israeli employees to active military duty, which could impact operations, alongside risks of damage to facilities or disruption to supply chains and trade[258][259] Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2023, the company withheld 32,000 common shares to satisfy tax obligations for restricted stock vesting, not part of a repurchase plan Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2023 | 30,000 | $2.74 | | August 2023 | 1,000 | $2.30 | | September 2023 | 1,000 | $2.34 | | Total | 32,000 | $2.71 | - The shares were withheld to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock and were not part of a publicly announced repurchase program[262][263] Exhibits Exhibits include amendments to the 2018 Incentive Plan and a severance agreement, CEO/CFO certifications, and Inline XBRL financial statements - Filed exhibits include certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[265] - An amendment to the Severance Agreement with CEO Steve Towe and an amendment to the 2018 Incentive Plan are included as exhibits[265]