Powerfleet, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative period is Q1 2021. Amounts are in U.S. dollars, in millions unless otherwise noted. The company provides IoT asset-management products and services, including hardware, SaaS, hosting and analytics.
Financial performance
| Metric | Q1 2021 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $28.991 | $33.161 | +14.3% |
| Product revenue | $11.420 | $14.392 | +26.0% |
| Service revenue | $17.571 | $18.769 | +6.8% |
| Gross profit / margin | $14.470 / 49.9% | $14.399 / 43.4% | Margin down 6.5 percentage points |
| Operating expenses | $16.353 | $18.141 | +10.9% |
| Operating loss | $(1.883) | $(3.742) | Loss widened |
| Net loss | $(1.787) | $(2.928) | Loss widened |
| Net loss attributable to common stockholders | $(2.983) | $(4.124) | Loss per share: $(0.09) to $(0.12) |
| Operating cash flow | $0.784 provided | $(2.125) used | Deteriorated by $2.909 |
Product gross margin fell to 16.8% from 28.6%, while service gross margin was essentially flat at 63.9% versus 63.8%. SG&A rose 9.6% to $14.912 million and research and development expense rose 17.7% to $3.229 million.
Financial position and liquidity
- At March 31, 2022, cash and cash equivalents were $20.559 million, plus $0.308 million of restricted cash; working capital was $40.504 million.
- Total assets were $225.898 million and total liabilities were $83.421 million.
- Term debt was $22.264 million, comprising $6.006 million current and $16.258 million long-term. No amounts were drawn on the $10 million revolving facility. The company reported compliance with credit covenants.
- Cash, cash equivalents and restricted cash declined $5.893 million during the quarter. Investing activities used $0.610 million, primarily for fixed assets; financing activities used $1.678 million, primarily for $1.497 million of debt repayment.
- Inventory increased to $20.313 million from $18.243 million, consistent with the company’s effort to buffer supply constraints.
Material changes and management commentary
- Revenue growth reflected higher PowerFleet for Logistics product sales and a larger installed base generating service revenue. Cost of revenue increased 29.2%, faster than revenue, leaving gross profit slightly lower in dollars.
- Management attributed weaker margins and profitability mainly to higher raw-material and electronic-component costs, supply shortages, product mix and inflation. Supply disruptions have also delayed, and may continue to delay, orders and deliveries.
- The company cited continuing uncertainty from COVID-19, supply-chain disruption, inflation and the Russia-Ukraine conflict. It said it was reducing discretionary expenses and capital expenditures to preserve cash.
- Management believes working capital, expected revenues and operating cash flows, together with available revolving-credit borrowing, are sufficient to fund capital requirements through at least May 10, 2023. The filing also states that operating cash flow alone has not been sufficient to fund operations.
- No specific revenue, earnings or margin guidance for future periods is provided in the filing.
Risks, contingencies and unusual items
- Internal controls: A previously reported material weakness in controls over the Israel component remained unremediated at March 31, 2022. Deficiencies included management-review design and documentation and verification of key reports. Management stated the weakness had not caused a restatement and that the financial statements presented fairly.
- Brazil tax disputes: One VAT assessment totaled $1.357 million including interest and penalties; another claim had a remaining amount of $0.189 million after a favorable administrative decision on the principal tax demand. Counsel assessed loss as not probable, and no provision was recorded.
- Preferred stock: Series A preferred stock carries cumulative dividends at a minimum annual rate of 7.5%, payable in cash or additional preferred shares subject to its terms. Preferred-stock accretion and dividends increased the common-stockholder loss beyond consolidated net loss.
- Other key risks include irregular customer deployment and order timing, customer retention and adoption, competition, technology and IP risks, integration of acquired businesses, and macroeconomic and supply-chain uncertainty.
Important facts for investors to verify
- Whether supply availability, component costs and inflation improve, and whether product margins recover from Q1 levels.
- Whether revenue growth converts into positive operating cash flow, given Q1 cash use and increased inventory.
- Cash runway assumptions and access to the undrawn revolving facility; verify debt amortization and covenant headroom.
- Progress and evidence of remediation of the Israel internal-control material weakness.
- Developments in the Brazilian tax matters and the terms and future cost of Series A preferred dividends and redemption rights.