Powerfleet, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless otherwise stated, financial amounts below are in millions of U.S. dollars; the filing presents financial statements in thousands.
Business context and reporting period
Powerfleet provides subscription-based wireless IoT and M2M solutions for tracking and managing industrial, logistics, and vehicle assets. The company operates in one reportable segment. Pointer was acquired on October 3, 2019, so it is included in 2020 results but not in the reported 2019 comparative results. Consequently, reported year-over-year growth is substantially acquisition-driven and is not a like-for-like comparison.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $27.6 | $16.9 | $84.2 | $46.8 |
| Gross profit | $14.9 | $7.6 | $43.8 | $21.7 |
| Gross margin | 54.1% | 45.2% | 52.1% | 46.4% |
| Operating income (loss) | $0.8 | $(2.1) | $(3.4) | $(6.9) |
| Net loss attributable to common stockholders | $(1.7) | $(2.1) | $(10.1) | $(6.9) |
| Loss per share, basic and diluted | $(0.06) | $(0.12) | $(0.34) | $(0.39) |
- Revenue mix: Q3 product revenue was $10.9 million, nearly flat year over year; service revenue was $16.7 million, up from $5.8 million, primarily reflecting Pointer. For the nine months, product revenue was $33.5 million and service revenue was $50.7 million.
- Costs and margins: Q3 gross margin improved, with management citing product mix and Pointer’s contribution. Nine-month product gross margin fell to 34.3% from 36.0%, while service gross margin rose to 63.9% from 63.4%.
- Operating expenses: Q3 SG&A was $11.6 million and R&D was $2.5 million. Both increased in dollars, principally due to Pointer, but declined as a percentage of revenue. There were no acquisition-related expenses in 2020 periods shown, compared with $1.6 million in Q3 2019 and $4.7 million for the first nine months of 2019.
- Cash flow: Operating activities provided $5.3 million in the first nine months of 2020, versus $4.3 million used in 2019. Investing activities used $2.0 million, mainly for capital expenditures of $2.1 million. Financing activities provided $2.3 million, including $4.0 million net ATM proceeds, partly offset by debt repayments. Cash, cash equivalents, and restricted cash increased $4.7 million to $21.4 million; cash and cash equivalents alone were $21.1 million.
- Liquidity: Working capital was $30.5 million at September 30, 2020. Management said available working capital, expected revenue and operating cash flows should fund capital requirements through at least November 14, 2021. The company stated it had not historically generated enough operating cash flow alone to fund operations.
- Debt and obligations: At September 30, term-loan debt was $27.8 million, including $4.9 million current and $22.9 million long term; short-term bank debt was $0.2 million, and convertible notes were $5.0 million. The notes were repaid on October 1, 2020 for $5.5 million including interest. The term loans are secured and subject to quarterly financial covenants, which the company reported it was complying with. Lease liabilities had a present value of $7.7 million.
- Preferred stock: Series A preferred stock had a $50.8 million carrying value and bears cumulative dividends at a minimum annual rate of 7.5%; three additional preferred shares were issued for dividends during the nine-month period. Preferred dividends charged to common stockholders were $3.4 million for the period.
Material changes versus the prior comparable period
- Revenue rose 63% in Q3 and 80% for the first nine months, primarily because Pointer was included in 2020 results. The 2019 reported comparison excludes Pointer; 2019 pro forma combined revenue was $34.7 million for Q3 and $100.0 million for nine months, but those pro forma figures are not necessarily indicative of actual results.
- Q3 operating results shifted from a $2.1 million loss to $0.8 million of operating income, while nine-month operating loss narrowed to $3.4 million from $6.9 million. Nine-month net loss attributable to common stockholders nevertheless increased to $10.1 million, primarily reflecting higher interest expense, taxes, and preferred dividends.
- Reported common shares outstanding increased from 29.7 million at December 31, 2019 to 31.1 million at September 30, 2020. The company issued 0.81 million shares through its ATM program and received approximately $4.0 million net; it terminated that agreement effective August 14, 2020.
- Foreign-currency translation reduced other comprehensive income by $1.9 million in the first nine months of 2020.
Outlook, risks, contingencies, and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management expects available liquidity and anticipated cash flows to cover capital requirements through at least November 14, 2021, but cautioned that COVID-19 makes the outlook uncertain. The company was taking steps to conserve cash, including targeted reductions in discretionary expenses and capital expenditures.
- COVID-19 and impairment: The pandemic was reported to be adversely affecting the broader economy and some customers and suppliers; the financial impact could not be reliably estimated. No impairment indicators were identified for the first nine months, but prolonged market weakness or a sustained decline in the share price could lead to impairment testing and potentially material charges.
- Business risks: Management highlighted customer concentration and irregular large-order timing, long sales and deployment cycles, competition, technology and intellectual-property risks, integration of Pointer, and dependence on successfully growing sales and converting initial deployments into broader rollouts.
- Contingencies: The filing describes Brazilian tax matters, including a 2014 claim of approximately $197,000 plus $1.482 million of interest and penalties for which a reasonably possible loss estimate could not be made. A separate 2015 assessment originally claimed approximately $10.680 million; after a favorable administrative decision, the remaining claim was $182,000. Management’s counsel believed the company would prevail in the latter matter, and no provision was recorded. Management said pending matters were not expected to have a material adverse effect.
- Controls: Management concluded disclosure controls were effective at the reasonable-assurance level. Pointer, which represented approximately 73% of assets and 57% of revenue, was excluded from the internal-control-over-financial-reporting assessment under the acquisition transition guidance.
Most important facts for investors to verify
- Separate Pointer’s acquired contribution from organic growth; compare 2020 results with the filing’s pro forma 2019 figures and assess their limitations.
- Track recurring service revenue, product and service margins, and whether Q3 operating income is sustained after acquisition-related scale effects.
- Reconcile cash generation with working-capital movements, capital spending, debt service, and the October 2020 repayment of the notes.
- Review term-loan covenants, scheduled maturities, preferred-stock dividend and redemption provisions, and future financing or dilution needs.
- Monitor COVID-19 effects, customer purchasing patterns, Pointer integration and internal-control coverage, and the outcomes of the Brazilian tax matters.