Powerfleet, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless otherwise noted, dollar amounts are in millions. Powerfleet provides subscription-based wireless IoT/M2M asset-management solutions. The October 2019 acquisition of Pointer materially changed the business; Pointer’s results are included from the acquisition date, so year-over-year comparisons are not like-for-like.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $25.8 | $16.3 | $56.6 | $29.9 |
| Gross profit / margin | $14.0 / 54.5% | $7.1 / 43.4% | $28.9 / 51.1% | $14.1 / 47.1% |
| Operating loss | $(0.7) | $(2.6) | $(4.1) | $(4.8) |
| Net loss attributable to common stockholders | $(3.8) | $(2.6) | $(8.3) | $(4.8) |
| Loss per share, basic and diluted | $(0.13) | $(0.15) | $(0.28) | $(0.27) |
Q2 revenue rose 58.3%, principally from Pointer; services increased to $16.4 million, while products declined 11.3% to $9.4 million. Management attributed the product decline partly to COVID-19. First-half revenue rose 89.3%; services were $34.0 million and products $22.6 million. The filing does not provide a clear organic-growth measure. Q2 loss per share improved despite a larger net loss, alongside a substantially higher weighted-average share count.
For the first half, operating cash flow was positive $4.4 million, versus cash use of $2.3 million in 2019. Investing activities used $0.8 million; financing activities provided $2.8 million, including $4.0 million of net ATM proceeds. Cash and cash equivalents were $21.5 million at June 30, with restricted cash of $0.3 million; working capital was $28.9 million.
At June 30, total debt was approximately $33.3 million: $28.1 million of secured term loans, $5.0 million of notes payable, and $0.2 million of short-term bank debt. The $10 million revolving facility was undrawn. Current liabilities were $40.3 million and current assets $69.2 million. Series A preferred stock, presented as mezzanine equity, was $49.7 million and carries cumulative dividends of at least 7.5% annually; the company issued preferred shares for dividends during the first half.
Changes, outlook, and risks
- Pointer acquisition drove much of the reported growth and added international revenue. In Q2, U.S. revenue was $10.8 million, Israel $9.1 million, and other regions $5.8 million.
- Q2 gross margin improved, supported by revenue mix and Pointer; first-half product gross margin declined to 32.3% from 36.9%, which management attributed to mix. First-half service gross margin increased to 63.8% from 62.5%.
- Management said COVID-19’s future impact was uncertain and could continue to affect customers, suppliers, results, and financial condition. It cited expense and capital-spending reductions and potential borrowing as cash-management measures.
- Management expected available working capital, forecast revenue and operating cash flows, and available borrowing to fund capital requirements through at least August 14, 2021. The company stated it had not historically generated enough operating cash flow alone to fund operations.
- The company reported compliance with credit-facility covenants. The term loans are secured and include quarterly financial tests; scheduled contractual obligations included $10.2 million of lease payments and $33.8 million of term-loan payments.
- Risks include COVID-19, customer concentration and irregular deployment cycles, integration and realization of Pointer benefits, competition, and possible impairment if market conditions worsen. No goodwill or other impairment indicators were identified for the first half. A Brazilian tax dispute had an original asserted amount of about $10.7 million; after a favorable administrative decision, the remaining claim was $0.2 million, and management said counsel believed the company would prevail.
Important facts to verify
- Reconcile the promissory-note maturity: the notes section says March 31, 2021, while MD&A says June 30, 2021.
- Confirm the correct June 30 cash figure when comparing disclosures: the balance sheet reports $21.5 million cash and cash equivalents, while cash including restricted cash is $21.8 million.
- Assess revenue and margin growth on an acquired-business-adjusted basis; reported comparisons include Pointer only from October 2019 and are not organic.
- Monitor cash conversion, ongoing operating losses, debt service, preferred-stock dividends and potential dilution. The company sold about $4.0 million of stock through its ATM in Q2 and gave notice to terminate the program effective August 14, 2020.
- Consider that internal-control assessment excluded Pointer, which represented approximately 72% of consolidated assets and 59% of revenue at June 30, 2020; management nevertheless concluded disclosure controls were effective.