Powerfleet, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020, compared with December 31, 2019. Unless otherwise stated, amounts are in U.S. dollars and millions. Powerfleet provides subscription-based wireless IoT/M2M asset-management products and services. The October 2019 Pointer acquisition materially changed the company; Q1 2020 results include Pointer, while Q1 2019 reported results do not, so year-over-year comparisons are not like-for-like.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $30.8 | $13.6 |
| Product revenue | $13.2 | $7.2 |
| Service revenue | $17.6 | $6.4 |
| Gross profit / margin | $14.9 / 48.3% | $7.0 / 51.6% |
| Operating loss | $(3.4) | $(2.2) |
| Net loss attributable to common stockholders | $(4.5) | $(2.2) |
| Loss per diluted share | $(0.16) | $(0.12) |
| Cash from (used in) operating activities | $2.8 | $(1.6) |
- Revenue rose 126.3%, primarily due to Pointer. Product sales also benefited from $2.3 million of PowerFleet for Vehicles product revenue, versus none in Q1 2019. Service revenue growth was partly offset by the completion of a non-recurring engineering program that contributed $1.8 million in Q1 2019.
- Gross margin declined 3.3 percentage points. Product margin fell to 29.6% from 41.5%, which management attributed principally to a greater mix of lower-margin vehicle solutions. Service margin increased to 63.8% from 62.9%.
- Operating expenses were $18.3 million, including $15.1 million of SG&A and $3.2 million of R&D; Q1 2019 included $1.4 million of acquisition-related fees. The reported common-stockholder loss includes $1.1 million of preferred dividends in Q1 2020.
- Operating cash flow improved to $2.8 million, despite the net loss, with noncash charges and working-capital movements contributing. Investing activities used $0.5 million, mainly for fixed assets; financing activities used $0.5 million, mainly for debt repayment. Cash, cash equivalents and restricted cash totaled $16.9 million at quarter-end, including $16.6 million unrestricted cash.
- Working capital was $24.1 million. Total current assets were $67.3 million and current liabilities $43.2 million.
- Debt at March 31 included $27.8 million of term loans, $0.6 million of short-term bank debt and a $5.0 million convertible note. The term loans are secured and subject to quarterly financial covenants; the company reported covenant compliance. The $10 million revolving facility was undrawn.
Material changes and notable items
- The Pointer acquisition, completed October 3, 2019, drove much of the reported revenue and expense increase. Q1 2019 pro forma revenue including Pointer was $31.3 million, but that pro forma period is not directly comparable to reported 2020 results and excludes expected synergies.
- Foreign-currency translation reduced other comprehensive income by $2.3 million in Q1 2020. Management also reported foreign-exchange losses within operating expenses and interest expense.
- Series A preferred stock dividends were paid in kind; the company recorded $1.1 million of preferred dividends for the quarter. The preferred stock has a cumulative minimum 7.5% annual dividend and significant conversion, redemption and investor-consent provisions.
- After quarter-end, on May 13, 2020, the $5 million investor notes were amended: the conversion feature was removed, certain mandatory prepayments were added, and maturity was extended to March 31, 2021. On May 14, the company entered into an agreement permitting up to $25 million of at-the-market common-stock sales; it was not obligated to sell shares.
Outlook, risks and contingencies
- Management said COVID-19 had begun affecting the business in Q1 and expected adverse effects to continue, but could not reasonably estimate the impact on future results or cash flows. The company reported targeted reductions in discretionary expenses and capital spending and identified borrowing on its revolver as a potential liquidity measure.
- Management believed working capital, expected revenues and operating cash flows would cover capital requirements through at least May 15, 2021. It also stated that operating cash flow alone had not historically been sufficient to fund operations. This outlook is subject to uncertainty, including pandemic effects.
- Management warned that continued economic weakness or a sustained decline in the share price could trigger impairment testing of goodwill, intangible assets and long-lived assets, potentially resulting in material charges. Goodwill was $88.9 million at quarter-end.
- Risks include customer concentration and irregular large deployment orders, integration and realization of Pointer acquisition benefits, competition, technology and intellectual-property risks, and exposure to emerging-market inflation. No customer exceeded 10% of Q1 2020 revenue or accounts receivable.
- Pointer Brazil’s tax dispute originally claimed approximately $11.9 million; after an administrative decision, the remaining claim was $156,000. Management’s counsel believed the company would prevail, and no provision was recorded. Management said it did not expect pending litigation, individually or collectively, to have a material adverse effect.
- Disclosure controls were deemed effective. Pointer, which represented approximately 73% of consolidated assets and 56% of revenue, was excluded from the internal-control-over-financial-reporting assessment under the SEC’s recently acquired business guidance.
Important facts for investors to verify
- How much revenue growth and future cash generation are attributable to Pointer versus underlying organic performance, and whether expected synergies are being realized.
- COVID-19 effects on customer demand, collections, suppliers, margins and the company’s liquidity outlook.
- The terms, repayment obligations and funding consequences of the amended $5 million notes, term-loan maturities and preferred-stock dividend and redemption provisions.
- Whether the company uses the $25 million ATM or other shelf-registration capacity, and the resulting dilution and cash proceeds.
- Progress on integration and internal-control assessment for Pointer, and any impairment indicators affecting goodwill or acquired intangible assets.