| 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 accounting principles generally accepted in the United States of America (“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 measurements of fair value of assets acquired and liabilities assumed and acquisition-related contingent consideration, realization of deferred tax assets, the impairment of tangible and intangible assets, the assessment of the Company’s incremental borrowing rate used to determine its right-of-use asset and lease liability, deferred revenue and stock-based compensation costs. Actual results could differ from those estimates.
[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, 2018 and 2019 consists of cash held in escrow for purchases from a vendor.
[D] Investments:
The Company’s investments include debt securities, U.S. Treasury Notes, government and state agency bonds, corporate bonds and commercial paper, which are classified as either available for sale, held to maturity or trading, depending on management’s investment intentions relating to these securities. All of the Company’s investments are currently classified as available for sale. Available for sale securities are measured at fair value based on quoted market values of the securities, with the unrealized gain and (losses) reported within comprehensive income or (loss). The Company has classified as short-term those securities that mature within one year and all other securities are classified as long-term. Realized gains and losses from the sale of available for sale securities are determined on a specific-identification basis. Net realized gains and losses from the sale of investment securities available for sale are included in “other income” in the consolidated statement of operations. Dividend and interest income are recognized when earned. Investments as of December 31, 2018 and 2019 were $4,525 and $-0-, respectively.
[E] 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 $67 and $2,004 in 2018 and 2019, respectively. The Company does not have any off-balance sheet credit exposure related to its customers.
[F] 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 13).
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 stand-alone 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 or right to invoice. The Company recognizes revenue on non-recurring
engineering services over time, on an input-cost method performance basis, as determined by the relationship of actual labor and
material costs incurred to date compared to the estimated total project costs. Estimates of total project costs are reviewed and
revised during the term of the project. Revisions to project costs estimates, where applicable, are recorded in the period in which
the facts that give rise to such changes become known. 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 sales-type leases. Accordingly, 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.
[G] Deferred costs:
Deferred product costs consist of logistics visibility solutions 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.
[H] 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.
[I] 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:
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
[J] 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.
[K] Business Combinations:
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 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 for an indication of goodwill impairment annually
during the 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. If under the quantitative assessment the
fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured
under step two of the impairment analysis. In the first phase of impairment testing, goodwill attributable to the reporting units
is tested for impairment by comparing the fair value of each reporting unit with its carrying value. If the carrying value of the
reporting unit exceeds its fair value, the second phase is then performed. The second phase of the goodwill impairment test compares
the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount
of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. For the years ended December 31, 2017, 2018 and 2019, the Company performed a qualitative goodwill
impairment test and did not incur an impairment charge. The Company re-measures the fair value of the
contingent consideration at each reporting period and any change in the fair value from either the passage of time or events occurring
after the acquisition date, is recorded in earnings in the accompanying consolidated statement of operations. Actual results could
differ from such estimates in future periods based on the re-measurement of the fair value. The contingent consideration was paid
during 2019.
[L] Product warranties:
The Company typically provides a 1 – 3 year warranty on its products. Estimated future warranty costs are accrued in the period that the related revenue is recognized. These estimates are derived from historical data and trends of product reliability and costs of repairing and replacing defective products.
[M] 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 $4,538, $6,863 and $8,540 in 2017, 2018 and 2019, respectively.
[N] Patent costs:
Costs incurred in connection with acquiring patent rights are charged to expense as incurred.
[O] 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 year ended December 31, 2019, one customer
accounted for 20% of the Company’s revenue. For the year ended December 31, 2018, two customers
accounted for 18% and 10% of the Company’s revenue, respectively, and one customer accounted for 11% of the Company’s
accounts receivable as of December 31, 2018. Two customers accounted for 19% and 13% of finance receivables as of December 31,
2018. One customer accounted for 16% the Company’s
revenue during the year ended and as of December 31, 2017 and two customers accounted for 14% and 11% of the Company’s accounts
receivable as of December 31, 2017. One customer accounted for 14% of finance receivables as of December 31, 2017.
[P] 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, 2017, 2018 and 2019.
[Q] 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 (the “Shut Down Method”). 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.
[R] 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 $2,437, $2,163 and $3,794 for the years ended December 31, 2017, 2018 and 2019, respectively.
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.
[S] 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, in the consolidated statement of operations. For the years ended December 31, 2017, 2018 and 2019, there was no such interest or penalty.
[T] 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. At December 31, 2019, the Company’s investments
in securities are classified as Level 1 for fair value measurement. 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.
December 31, 2019
Carrying Amount
Fair Value
Long term debt $ 29,203 $ 29,203
[U] Advertising and marketing expense:
Advertising and marketing costs are expensed as incurred. Advertising and marketing expense for the years ended December 31, 2017, 2018 and 2019 amounted to $538, $996 and $1,228, respectively.
[V] Foreign currency translation:
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 financial of $(373), $77 and $653 at December 31, 2017, 2018 and 2019, respectively,
which are included in comprehensive loss in the Consolidated Statement of Changes in Stockholders’ Equity. Foreign currency translation 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 translation gains (losses) for the years ended December 31, 2017, 2018 and 2019 of $456, $(214) and $(467),
respectively, are included in selling, general and administrative expenses in the Consolidated Statement of Operations.
[W] 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.
[X] 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 Company has not early adopted the new standard for 2019 and is evaluating the impact of the new guidance on our financial statements.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02 Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for adjustments to the tax effect of items in AOCI, that were originally recognized in other comprehensive income, related to the new statutory rate prescribed in the Tax Cuts and Jobs Act (“TCJA”) enacted on December 22, 2017, which reduced the US federal corporate tax rate from 35% to 21%. The amendments in this update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the US federal corporate income tax rate in the TCJA is recognized. The adoption of this standard on January 1, 2019 had no impact to our 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 update standard is effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies how
an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures
a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of
that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the
carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. The updated guidance requires a prospective adoption. The guidance is effective beginning
fiscal year 2020. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on the consolidated financial
statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842), which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. For leases with a term of 12 months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Also, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): “Targeted Improvements,” which provides an optional transition method to allow entities, on adoption of ASU 2016-02, to report prior periods under previous lease accounting guidance. The revised guidance must be applied on a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The revised guidance is effective for the Company beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted Topic 842; refer to Note 14 - Leases for more information.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU was effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s financial results.
[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. |
