Powerfleet, Inc. quarterly report, Q2 FY2022

Business context and reporting period

PowerFleet, Inc. provides IoT asset-management devices, software and services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022; financial figures below are in millions of dollars unless otherwise noted.

Financial performance and liquidity

Q2 revenue rose 3.1% year over year: service revenue increased 9.4% to $19.8 million, while product revenue fell 4.2% to $14.8 million. For the first half, revenue grew 8.3%, with products up 8.6% and services up 8.1%. Basic and diluted loss per share was $0.04 in Q2 and $0.15 for the first half, compared with $0.08 and $0.16, respectively, in 2021.

For the six months, operating cash flow was a use of $2.7 million, versus a source of $3.2 million in 2021. Investing activities used $2.0 million, primarily for capital expenditures; financing activities used $0.8 million. Cash, cash equivalents and restricted cash declined by $8.7 million, including a $3.3 million adverse foreign-exchange effect. At June 30, cash and cash equivalents were $17.7 million, restricted cash was $0.3 million, and working capital was $38.5 million.

Balance-sheet debt was $21.2 million ($7.8 million current and $13.4 million long-term); the company also reported $2.3 million borrowed under its revolving facility. It reported $55.1 million of Series A convertible redeemable preferred stock in mezzanine equity. The filing says the company was in compliance with its credit covenants.

Material changes and management commentary

• Gross margin declined year over year, particularly for products: first-half product gross margin fell to 20.2% from 29.3%. Management attributed pressure to product mix, semiconductor and other component shortages, supply-chain costs, and inflation. Service margins improved, supported by a larger installed base.
• SG&A increased 17.9% in Q2 and 13.7% for the first half, attributed to salaries, professional services and, for the half-year, travel and foreign-currency translation losses. R&D expense decreased, principally because some new-product software development costs were capitalized.
• Inventory increased to $23.5 million from $18.2 million at year-end 2021. Management said it increased inventory to mitigate supply disruptions; the first-half increase in inventory was a significant operating cash outflow.
• The statements show a positive $1.5 million Q2 and $1.6 million first-half amount on the “interest expense” line. Management attributes the favorable interest result to foreign-currency translation gains on term debt. Investors should confirm the line-item presentation and underlying effect.

Outlook, risks and contingencies

Management said available working capital, expected revenue and operating cash flows, and available revolving-credit borrowings were expected to fund capital requirements through at least August 9, 2023. The company noted it had not historically generated sufficient operating cash flow alone to fund operations and had taken steps including targeted reductions in discretionary expenses and capital expenditures.

Management identified uncertainty from COVID-19, supply-chain disruption and chip shortages, inflation, rising interest rates, and the Russia-Ukraine conflict. It warned that these factors could delay orders and deliveries, increase costs, pressure margins and affect cash flows. It provided no numerical revenue or earnings guidance.

Brazilian tax disputes include a VAT assessment of $1.2 million and a separate claim initially stated at approximately $12.6 million, reduced to $0.2 million after an administrative decision. Management’s counsel considered losses not probable; no provision was recorded. The company also disclosed an unremediated material weakness in controls over financial reporting for its Israel component, involving management review, close-process documentation and validation of key reports. Management said the weakness had not caused a restatement and that the reported statements fairly presented the periods shown.

Most important facts to verify

• Whether supply constraints and inflation continue to depress product margins, and whether elevated inventory can be converted into shipments and cash.
• The pace of cash use and the assumptions supporting management’s stated liquidity runway through August 9, 2023.
• Debt balances, facility availability and covenant compliance, alongside the economic and potential dilution or redemption implications of the Series A preferred stock.
• Progress remediating the Israel internal-control material weakness and any changes in reporting reliability.
• Developments in the Brazil tax matters and the stated foreign-exchange gains affecting reported interest results.