PowerFleet, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 10, 2021. Unless otherwise noted, financial amounts below are in U.S. dollars, millions. PowerFleet provides subscription-based wireless IoT/M2M asset-management solutions. Comparative figures are for the corresponding 2020 periods.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $29.25 | $27.60 | $91.79 | $84.17 |
| Gross profit | $14.27 | $14.92 | $44.78 | $43.83 |
| Gross margin | 48.8% | 54.1% | 48.8% | 52.1% |
| Operating income (loss) | $(2.43) | $0.75 | $(4.47) | $(3.36) |
| Net loss attributable to common stockholders | $(4.54) | $(1.75) | $(10.16) | $(10.06) |
| Loss per common share, diluted | $(0.13) | $(0.06) | $(0.30) | $(0.34) |
Q3 revenue increased 6.0%; services grew 10.6% to $18.46 million while products declined 1.2% to $10.79 million. For the first nine months, revenue increased 9.1%, with products up 12.4% and services up 6.8%. Service revenue growth was principally attributed to PowerFleet for Vehicles solutions.
Q3 cost of revenue rose 18.1%, faster than sales, and gross margin contracted 5.3 percentage points. Product gross margin fell to 24.2% from 38.6%; service gross margin was 63.1% versus 64.2%. Operating expenses rose to $16.69 million from $14.17 million, including SG&A of $13.96 million versus $11.64 million. For nine months, operating expenses were $49.25 million versus $47.19 million.
Cash flow, balance sheet and capital
- At September 30, 2021, cash and cash equivalents were $33.82 million and restricted cash was $0.31 million; working capital was $49.37 million. Total assets were $228.29 million and total liabilities were $77.00 million.
- Nine-month operating cash flow was a use of $1.25 million, versus a source of $5.29 million in 2020. Investing cash outflow was $2.53 million, mainly capital expenditures. Financing cash inflow was $19.66 million, primarily reflecting $26.91 million net proceeds from the February stock offering, partly offset by $4.04 million of debt repayment and $3.08 million of preferred dividends.
- Reported short-term bank debt and current maturities totaled $6.23 million; long-term debt was $19.03 million. The revolving facility was undrawn. The company reported compliance with its credit covenants. It amended its loan terms to reduce fixed rates to 3.65% on Term A and 4.5% on Term B, reduce the unused facility fee, and remove a $3 million reserve-deposit requirement.
- PowerFleet said operating cash generation alone had not funded operations and expected available working capital, anticipated revenue and operating cash flows, and revolving-credit availability to cover capital requirements through at least November 10, 2022.
Material changes, outlook and risks
- Management attributed weaker Q3 product sales partly to supply-chain issues. COVID-19-related disruptions and the semiconductor shortage caused delays, longer lead times, component shortages, raw-material cost increases and production slowdowns. The company increased inventory to protect supply; inventory rose to $16.20 million from $12.87 million at year-end.
- Management said product margins were also pressured by mix, component shortages, inflation, and a one-time $0.4 million incentive tied to an existing North American chassis-lessor customer. That customer ordered about 3,000 units for Q4 2021 and committed to order an additional 10,000–15,000 units in 2022. The filing provides no formal revenue or earnings guidance.
- Management linked higher Q3 SG&A and R&D primarily to reversal of temporary cost reductions made in early 2020. It cautioned that order timing can be irregular because of long sales cycles and large, sporadic customer deployments.
- Principal stated risks include continued component and semiconductor supply constraints, further cost increases or delivery delays, COVID-19 uncertainty, customer concentration or reduced demand, competition, technology and product-development challenges, and execution of growth and acquisition integration. The company said it could not reasonably estimate the future financial impact of pandemic and supply-chain developments.
- Series A preferred stock carries cumulative dividends of at least 7.5% annually, with contractual escalation provisions. The company paid $3.085 million of preferred dividends in the first nine months. A right to redeem 10,000 preferred shares expired October 1, 2021 without exercise.
- Two Brazilian tax matters remain disclosed: an ICMS assessment totaling about $1.174 million, for which counsel assessed loss as not probable and no provision was recorded; and a separate remaining claim of $0.189 million, for which counsel believed the company would prevail and no provision was recorded. Management did not expect litigation matters, individually or collectively, to have a material adverse effect.
Most important facts to verify
- Whether semiconductor and other supply constraints continue to limit product shipments, raise costs, or delay customer deliveries—and how quickly product margins recover.
- Delivery and revenue timing for the 3,000-unit Q4 order and the customer’s 10,000–15,000-unit 2022 commitment.
- Operating cash flow and working-capital trends, especially the increases in accounts receivable and inventory, and the company’s stated liquidity runway.
- Debt amortization and covenant compliance, as well as the cash and dilution implications of preferred dividends and any future equity financing.
- Developments in the Brazilian tax disputes and the ongoing COVID-19, inflation and supply-chain risks.