| 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 measurements of fair value of assets acquired
and liabilities assumed, 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. As of December 31, 2020, the impact
of the outbreak of COVID-19 continues 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, 2019 and 2020 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 $2,004 and $2,364 in 2019 and 2020, respectively.
The Company does not have any off-balance sheet credit exposure related to its customers. [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 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 when the service is provided. The Company recognizes revenue on
non-recurring engineering (“NRE”) 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. For the years ended December 31, 2018,
2019 and 2020, the Company recognized NRE revenue of $-0-, $3,823, and $-0-, respectively 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. [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:
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] 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 and 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. For the years ended December 31, 2018, 2019 and 2020, 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. There is no contingent consideration remaining as of December 31, 2020. [K] 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. [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 $6,863, $8,540 and $10,597 in 2018, 2019 and 2020, respectively. [ 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 year ended December 31, 2020,
there were no customers who generated revenues greater than 10% of the Company’s consolidated total revenues or generated
greater than 10% of the Company’s consolidated accounts receivable. 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. [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, 2018, 2019 and 2020. [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 (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. [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 $2,163, $3,794 and $4,142 for
the years ended December 31, 2018, 2019 and 2020, 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. [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, 2018, 2019
and 2020, 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.
December 31, 2020
Carrying Amount
Fair Value
Long term debt $ 28,478 $ 28,478
[T] Advertising and marketing expense: Advertising and marketing costs are
expensed as incurred. Advertising and marketing expense for the years ended December 31, 2018, 2019 and 2020 amounted to $996,
$1,228 and $1,022, respectively. [U] 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
from the translation of foreign currency financial of $77, $653 and $134 at December 31, 2018, 2019 and 2020, 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, 2018, 2019 and 2020 of $(214),
$(42) and $148, respectively, are included in selling, general and administrative expenses in the Consolidated Statement of Operations.
Foreign currency translation (losses) related to long-term debt of $-0-, $(425) and $(2,137), respectively, for the years ended
December 31, 2018, 2019 and 2020, are included in interest expense in the Consolidated Statement of Operations. [ 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 Company has not early adopted the new standard for 2020 and is evaluating the impact
of the new guidance on 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 updated 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 adoption of this
standard did not have an impact on the Company’s 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. |
