| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [A]
Principles of consolidation The
consolidated financial statements include the accounts of PowerFleet, Inc. and its subsidiaries (which, as noted above, are collectively
referred to herein as the “Company”). All material intercompany balances and transactions have been eliminated in consolidation. [B]
Use of estimates The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates
estimates used in the preparation of the financial statements for reasonableness. The most significant estimates relate to
realization of deferred tax assets, accounting for uncertain tax positions, the impairment of intangible assets, including goodwill,
capitalized software development costs, stock-based compensation costs and standalone selling price related to multiple element
revenue arrangements. Actual results could differ from those estimates. As
of December 31, 2022, the impact of global uncertainties continue to unfold. As a result, many of our estimates and assumptions
required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional
information becomes available, our estimates may change materially in future periods. [C]
Cash and cash equivalents The
Company considers all highly liquid debt instruments with an original maturity of three months or less when purchased to be cash equivalents
unless they are legally or contractually restricted. The Company’s cash and cash equivalent balances exceed Federal Deposit Insurance
Corporation (“FDIC”) and other local jurisdictional limits. Restricted cash at December 31, 2021 and 2022 consists of cash
held in escrow for purchases from a vendor. [D]
Accounts receivable Accounts
receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included
in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains reserves against its
accounts receivable for potential losses. Allowances for uncollectible accounts are estimated based on the Company’s periodic review
of accounts receivable balances. In establishing the required allowance, management considers our customers’ financial condition,
the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off
against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Accounts
receivable are net of an allowance for doubtful accounts in the amount of $ 3,176 2,567 [E]
Revenue recognition The
Company and its subsidiaries generate revenue from sales of systems and products and from customer SaaS and hosting infrastructure fees.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.
Sales, value add, and other taxes the Company collects concurrently with revenue-producing activities are excluded from revenue. Incidental
items that are immaterial in the context of the contract are recognized as expense. The expected costs associated with the Company’s
base warranties continue to be recognized as expense when the products are sold (see Note 11). Revenue
is recognized when performance obligations under the terms of a contract with our customer are satisfied. Product sales are recognized
at a point in time when title transfers, when the products are shipped, or when control of the system is transferred to the customer,
which usually is upon delivery of the system and when contractual performance obligations have been satisfied. For products which do
not have standalone value to the customer separate from the SaaS services provided, the Company considers both hardware and SaaS services
a bundled performance obligation. Under the applicable accounting guidance, all of the Company’s billings for equipment and the
related cost for these systems are deferred, recorded, and classified as a current and long-term liability and a current and long-term
asset, respectively. The deferred revenue and cost are recognized over the service contract life, ranging from one to five years, beginning
at the time that a customer acknowledges acceptance of the equipment and service. The
Company recognizes revenue for remotely hosted SaaS agreements and post-contract maintenance and support agreements beyond our standard
warranties over the life of the contract. Revenue is recognized ratably over the service periods and the cost of providing these services
is expensed as incurred. Amounts invoiced to customers which are not recognized as revenue are classified as deferred revenue and classified
as short-term or long-term based upon the terms of future services to be delivered. Deferred revenue also includes prepayment of extended
maintenance, hosting and support contracts. The
Company earns other service revenues from installation services, training and technical support services which are short-term in nature
and revenue for these services are recognized at the time of performance when the service is provided. The
Company also derives revenue from leasing arrangements. Such arrangements provide for monthly payments covering product or system
sale, maintenance, support and interest. These arrangements meet the criteria to be accounted for as operating or sales-type leases.
Accordingly, for sales-type leases an asset is established for the “sales-type lease receivable” at the present value of
the expected lease payments and revenue is deferred and recognized over the service contract, as described above. Maintenance
revenues and interest income are recognized monthly over the lease term. The
Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue
to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices
based on observable prices charged to customers or adjusted market assessment or using expected cost-plus margin when one is available.
Adjusted market assessment price is determined based on overall pricing objectives taking into consideration market conditions and entity
specific factors. The
Company recognizes an asset for the incremental costs of obtaining the contract arising from the sales commissions to employees because
the Company expects to recover those costs through future fees from the customers. The Company amortizes the asset over one to five years
because the asset relates to the services transferred to the customer during the contract term of one to five years. The
Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one
year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice
for services performed. [F]
Deferred costs Deferred
product costs consist of Powerfleet for Logistics equipment costs deferred in accordance with our revenue recognition policy. The Company
evaluates the realizability of the carrying amount of the deferred contract costs. To the extent the carrying value of the deferred contract
costs exceed the contract revenue, an impairment loss will be recognized. [G]
Inventory Inventories
are stated at the lower of cost or net realizable value. Cost is determined using the “moving average” cost method or the
first-in first-out (“FIFO”) method. Inventory consists of components, work in process and finished products. Inventory
valuation reserves are established in order to report inventories at the lower of cost or net realizable value in the consolidated balance
sheet. The determination of inventory valuation reserves requires management to make estimates and judgments on the future salability
of inventories. Valuation reserves for obsolete and slow-moving inventory are estimated based on assumptions of future sales forecasts,
product life cycle expectations, the impact of new product introductions, production requirements, and specific identification of items,
such as product discontinuance or engineering/material changes and by comparing the inventory levels to historical usage rates. [H]
Fixed assets and depreciation Fixed
assets are recorded at cost, net of accumulated depreciation. Depreciation and amortization are recognized using the straight-line method
over the estimated useful lives of the assets. The following table provides the range of estimated useful lives used for each asset type: SCHEDULE
OF ESTIMATED USEFUL LIVES OF ASSET
Useful
Life (years)
Computer software 3 5
Installed products 3 5
Computers and electronic equipment 3 10
Furniture and fixtures 5 7
Leasehold improvements Shorter of useful life or
lease term [I]
Long-lived assets Long-lived
assets, which includes definite lived intangible assets and fixed assets, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison
of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets and would be charged to earnings. Fair value is determined through various valuation techniques including
discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. [J]
Goodwill and intangibles Goodwill
represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets
deemed to have indefinite lives are not amortized and are tested for impairment on an annual basis and between annual tests whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets other than goodwill are
amortized over their useful lives unless the lives are determined to be indefinite. Intangible assets are carried at cost, less accumulated
amortization. Intangible assets consist of trademarks and trade name, patents, customer relationships, software to be sold or leased, and other intangible assets. Goodwill
is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. The Company
operates in one operating segment which is its only reporting unit. The Company tests its goodwill for impairment annually which is the
first day of the Company’s fourth quarter or when an indicator of impairment exists, by comparing the fair value of the reporting
unit to its carrying value. In
the evaluation of goodwill for impairment, the Company has the option to perform a qualitative assessment to determine whether further
impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying
amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit
unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. By eliminating “Step
2” from the goodwill impairment test, the quantitative analysis of goodwill will result in an impairment loss for the amount that
the carrying value of the reporting unit exceeds its fair value which is limited to the total amount of goodwill allocated to the reporting
unit. The
Company performed a quantitative assessment whereby the fair value of the reporting unit is calculated using a market approach and a
discounted cash flow method, as a form of the income approach. The market approach includes the use of comparative revenue and adjusted
EBITDA multiples to complement discounted cash flow results. The discounted cash flow method is based on the present value of the projected
cash flows and a terminal value. The terminal value represents the expected normalized future cash flows of the reporting unit beyond
the cash flows from the discrete projection period. The fair value of the reporting unit is calculated based on the sum of the present
value of the cash flows from the discrete period and the present value of the terminal value. The discount rate represented our estimate
of the WACC, or expected return, that a marketplace participant would have required as of the valuation date. The application of our
goodwill impairment test required key assumptions underlying our valuation model. The
discounted cash flow analysis factored in assumptions on discount rates and terminal growth rates to reflect risk profiles, as well as
revenue and cost growth relative to history and market trends and expectations. The market multiples approach incorporated judgment involved
in the selection of comparable public company multiples and benchmarks. The selection of companies and multiples was influenced by differences
in growth and profitability, and volatility in market prices of peer companies. These valuation inputs are inherently judgmental, and
an adverse change in one or a combination of these inputs could trigger a goodwill impairment loss in the future. For the years ended December
31, 2020, 2021 and 2022, the Company did not incur an impairment charge. [K]
Product warranties The
Company typically provides a 1 – 8 year warranty on its products [L]
Research and development Research
and development costs are charged to expense as incurred and consists primarily of salaries and related expenses, supplies and contractor
costs. Research and development costs were $ 10,597 11,058 8,964 [ M]
Patent costs Cost
incurred in connection with acquiring patent rights are charged to expense as incurred. [N]
Concentrations of credit risk Financial
instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and
cash equivalents, trade receivables and trade payables. The
Company’s cash and cash equivalents are invested primarily in deposits with major banks worldwide. Generally, these deposits may
be redeemed upon demand and, therefore, bear low risk. Management believes that the financial institutions that hold the Company’s
investments have a high credit rating. For
the years ended December 31, 2022, 2021, and 2020, there were no customers who generated revenues greater than 10% of the Company’s consolidated
total revenues or generated greater than 10 [O]
Benefit plan The
Company maintains a retirement plan under Section 401(k) of the Internal Revenue Code, which covers all eligible employees. All employees
with U.S. source income are eligible to participate in the plan immediately upon employment. The Company did not make any contributions
to the plan during the years ended December 31, 2020 and 2021. In 2022, the Company contributed $285 to the plan. [P]
Severance pay The
liability of the Company’s subsidiaries in Israel for severance pay is calculated pursuant to Israel’s Severance Pay Law
5273-1963 (the “Severance Law”) based on the most recent salary of the employees multiplied by the number of years of
employment as of balance sheet date and are presented on an undiscounted basis. Employees are
entitled to one month’s salary for each year of employment, or a portion thereof. The liability for the Company and its
subsidiaries in Israel is fully provided by monthly deposits with insurance policies and by accrual. The value of these policies is
recorded as an asset in the Company’s balance sheet. The
deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to the Severance Law or labor agreements. The value
of the deposited funds is based on the cash surrendered value of these policies, and includes profits or losses accumulated to balance
sheet date. Some
of the Company’s employees are subject to Section 14 of the Severance Law and the General Approval of the Labor Minister dated
June 30, 1998, issued in accordance to the said Section 14, mandating that upon termination of such employees’ employment, all
the amounts accrued in their insurance policies shall be released to them. The severance pay liabilities and deposits covered by these
plans are not reflected in the balance sheet as the severance pay risks have been irrevocably transferred to the severance funds. [Q]
Stock-based compensation The
Company accounts for stock-based employee compensation for all share-based payments, including grants of stock options and restricted
stock, as an operating expense based on their fair values on grant date. The Company recorded stock-based compensation expense of $ 4,142 4,416 4,343 The
Company estimates the fair value of share-based option awards on the grant date using an option pricing model. The value of the portion
of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s consolidated
statement of operations. The Company estimates forfeitures at the time of grant in order to estimate the amount of share-based awards
that will ultimately vest. The estimate is based on the Company’s historical rates of forfeitures. Estimated forfeitures are revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates. [R]
Income taxes The
Company uses the asset and liability method of accounting for deferred income taxes. Deferred income taxes are measured by applying enacted
statutory rates to net operating loss carryforwards and to the differences between the financial reporting and tax bases of assets and
liabilities. Deferred tax assets are reduced, if necessary, by a valuation allowance if it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The
Company recognizes uncertainty in income taxes in the financial statements using a recognition threshold and measurement attribute of
a tax position taken or expected to be taken in a tax return. The Company applies the “more-likely-than-not” recognition
threshold to all tax positions, commencing at the adoption date of the applicable accounting guidance, which resulted in no unrecognized
tax benefits as of such date. Additionally, there have been no unrecognized tax benefits subsequent to adoption. The Company has opted
to classify interest and penalties that would accrue according to the provisions of relevant tax law as selling, general, and administrative
expenses and incomes taxes, respectively, in the consolidated statement of operations. For the years ended December 31, 2020, 2021 and
2022, interest and penalties were immaterial. [S]
Fair value of financial instruments The
Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad
levels. The following is a brief description of those levels:
● Level 1: Unadjusted quoted
prices in active markets for identical assets or liabilities
● Level 2: Inputs other than
quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not
active.
● Level 3: Unobservable inputs
that reflect the reporting entity’s estimates of market participant assumptions The
Company’s cash and cash equivalents and investments in securities are carried at fair value. The carrying value of financing receivables
approximates fair value due to the interest rate implicit in the instruments approximating current market rates. The carrying value of
accounts receivables, accounts payable and accrued liabilities and short term bank debt approximates their fair values due to the short
period to maturity of these instruments. The fair value of the Company’s long term debt is based on observable relevant market
information and future cash flows discounted at current rates, which are Level 2 measurements. SCHEDULE
OF FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31, 2022
Carrying Amount Fair Value
Long term debt $ 21,715 $ 21,224 [T]
Advertising and marketing expense Advertising
and marketing costs are expensed as incurred. Advertising and marketing expense for the years ended December 31, 2020, 2021 and 2022
amounted to $ 1,022 1,185 1,084 [U]
Foreign currency The
Company’s reporting currency is the U.S dollar (“USD”). For businesses where the majority of the revenues are generated
in USD or linked to the USD and a substantial portion of the costs are incurred in USD, the Company’s management believes that
the USD is the primary currency of the economic environment and thus their functional currency. Due to the fact that Argentina has been
determined to be highly inflationary, the financial statements of our subsidiary in Argentina have been remeasured as if its functional
currency was the USD. The Company also has foreign operations where the functional currency is the local currency. For these operations,
assets and liabilities are translated using the end-of-period exchange rates and revenues, expenses and cash flows are translated using
average rates of exchange for the period. Equity is translated at the rate of exchange at the date of the equity transaction. Translation
adjustments are recognized in stockholders’ equity as a component of accumulated other comprehensive income (loss). Net translation
gains (losses) from the translation of foreign currency are $ 134 (8) (1,601) Foreign
currency transaction gains and losses related to operational expenses denominated in a currency other than the functional currency
are included in determining net income or loss. Foreign currency transaction gains (losses) for the years ended December 31, 2020,
2021 and 2022 of $ 148 (128) (847) (2,137) 810 2,689 [ V]
Commitments and contingencies From
time to time, the Company is involved in various litigation matters involving claims incidental to its business and acquisitions, including
employment matters, acquisition related claims, patent infringement and contractual matters, among other issues. While the outcome of
any such litigation matters cannot be predicted with certainty, management currently believes that the outcome of these proceedings,
including the matters described below, either individually or in the aggregate, will not have a material adverse effect on its business,
results of operations or financial condition. The Company records reserves related to legal matters when losses related to such litigation
or contingencies are both probable and reasonably estimable. [W]
Recently issued accounting pronouncements In
December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2019-12, Simplifying the Accounting for Income Taxes which removes certain exceptions related to the approach for intraperiod tax allocation,
the methodology for calculating income taxes in an interim period, the recognition of deferred tax liabilities for outside basis differences
and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is generally effective
as of January 1, 2021, with early adoption permitted. The adoption of the standard did not have an impact on the Company’s consolidated
financial statements. In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on
Financial Instruments,” which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment
is intended to address the issue that the previous “incurred loss” methodology was restrictive for an entity’s ability
to record credit losses based on not yet meeting the “probable” threshold. The new language will require these assets to
be valued at amortized cost presented at the net amount expected to be collected with a valuation provision. This updated standard is
effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this ASU on the consolidated
financial statements. [Y]
Reclassifications Certain
prior amounts have been reclassified to conform with the current year presentation for comparative purposes. These reclassifications
had no effect on the previously reported results of operations. |
