Item
1. Business.
Overview
PowerFleet,
Inc. (together with its subsidiaries, “PowerFleet,” the “Company,” “we,” “our”
or “us”) is a global leader and provider of subscription-based wireless Internet-of-Things (IoT) and machine-to-machine
(M2M) solutions for securing, controlling, tracking, and managing high-value enterprise assets such as industrial trucks, trailers,
containers, cargo, and light vehicles and heavy truck fleets.
As
described more fully in Note 3 to our consolidated financial statements included in this Annual Report on Form 10-K, on October
3, 2019, we completed the Transactions (as defined below) contemplated by (i) the Agreement and Plan of Merger, dated as of March
13, 2019 (the “Merger Agreement”), by and among I.D. Systems, Inc., a Delaware corporation (“I.D. Systems”),
the Company, Pointer Telocation Ltd., a private company limited by shares formed under the laws of the State of Israel (“Pointer”),
PowerFleet Israel Ltd. (f/k/a Powerfleet Israel Holding Company Ltd.), a private company limited by shares formed under the laws
of the State of Israel and a wholly-owned subsidiary of the Company (“PowerFleet Israel”), and Powerfleet Israel Acquisition
Company Ltd., a private company limited by shares formed under the laws of the State of Israel and a wholly-owned subsidiary of
PowerFleet Israel prior to the Transactions, and (ii) the Investment and Transaction Agreement, dated as of March 13, 2019, as
amended by Amendment No. 1 thereto dated as of May 16, 2019, Amendment No. 2 thereto dated as of June 27, 2019 Amendment No. 3
thereto dated as of October 3, 2019 and Amendment No. 4 thereto dated as of May 13, 2020 (the “Investment Agreement,”
and together with the Merger Agreement, the “Agreements”), by and among I.D. Systems, the Company, PowerFleet US Acquisition
Inc., a Delaware corporation and a wholly-owned subsidiary of the Company prior to the Transactions, and ABRY Senior Equity V,
L.P., ABRY Senior Equity Co-Investment Fund V, L.P. and ABRY Investment Partnership, L.P. (the “Investors”), affiliates
of ABRY Partners II, LLC. As a result of the transactions contemplated by the Agreements (the “Transactions”), I.D.
Systems and PowerFleet Israel each became direct, wholly-owned subsidiaries of the Company and Pointer became an indirect, wholly-owned
subsidiary of the Company. The results of Pointer have been included in our consolidated financial statements from the date of
the Transactions.
We
are headquartered in Woodcliff Lake, New Jersey, with offices located around the globe.
Our
patented technologies address the needs of organizations to monitor and analyze their assets to improve safety, increase efficiency
and productivity, reduce costs, and improve profitability. Our offerings are sold under the global brands PowerFleet, Pointer
and Cellocator.
We
deliver advanced mobility solutions that connect assets to increase visibility operational efficiency and profitability. Across
our vertical markets we differentiate ourselves by developing mobility platforms that collect data from unique sensors and by
being OEM agnostic and helping mixed fleets view and manage their assets homogeneously. All of our solutions are paired with software
as a service, or SaaS and analytics platforms to provide an even deeper level of insights and understanding of how assets are
utilized and how drivers and operators operate those assets. These insights include a full set of operational Key Performance
Indicators, or KPI’s, to drive operational and strategic decisions. Our customers typically get a Return on their Investment
in less than 12 months from deployment.
The
analytics platform and machine learning capabilities, which is integrated into our customers’ management systems, is designed
to provide a single, integrated view of asset and operator activity across multiple locations that provides enterprise-wide benchmarks
and peer-industry comparisons. We look for analytics, as well as the data contained therein, to differentiate us from our competitors,
make a growing contribution to revenue, add value to our solutions, and help keep us at the forefront of the wireless asset management
markets we serve.
We
market and sell our wireless mobility solutions to a wide range of customers in the commercial and government sectors. Our customers
operate in diverse markets, such as automotive manufacturing, retail, food and grocery distribution pharmaceutical and medical
distribution, logistics, shipping, freight transportation, heavy industry, wholesale distribution, manufacturing, aerospace and
vehicle rental.
PowerFleet
for Industrial (part of our Supply Chain Solutions Product Group)
Our
PowerFleet for Industrial solutions are designed to provide on-premise or in-facility asset and operator management, monitoring,
and visibility for industrial trucks such as forklifts, man-lifts, tuggers and ground support equipment at airports. These solutions
are broken down into five groups: Essence, Expert, Enterprise, Safety, and Aviation and utilize a variety of communications capabilities
such as Bluetooth ®, WiFi, and proprietary RF.
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Essence
is designed for low density fleets. It consists of an easy-to-install, out-of-the-box-ready hardware and software solution.
It provides electronic record keeping and safety checklists and is automated. There is no need for IT departments with this
solution, and it is designed to keep small business operations regulatory compliant, efficient, and cost effective.
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Expert
is designed for medium density fleets. It is designed for multi-site visibility, reporting, and analytics. It provides
regulatory compliance and live events by leveraging a company’s existing Wi-Fi network. It delivers centralized recording,
management reports & robust graphing.
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Enterprise
is for high density fleets with a global footprint. It improves safety and provides global visibility, advanced analytics,
and drives regulatory compliance and live event reporting by leveraging a company’s Wi-Fi network.
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Safety
consists of a broad range of equipment for powered industrial vehicles such as lights and alarms, camera systems, vehicle
speed throttles, seatbelt systems, digital speedometers, weighing devices, safety systems, and anti-theft solutions.
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Aviation
enables visibility into airport ramp personnel and assets through real-time visibility and reporting, access control,
and geo-fenced security.
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PowerFleet
for Logistics (part of our Supply Chain Solutions Product Group)
Our
PowerFleet for Logistics solutions are designed to provide bumper-to-bumper asset management, monitoring, and visibility for over-the-road
based assets (heavy trucks, dry-van trailers, refrigerated trailers, shipping containers, etc.) and their associated cargo. These
systems provide mobile-asset tracking and condition-monitoring solutions to meet the transportation market’s desire for
greater visibility, safety, security, and productivity throughout global supply chains.
By
leveraging a combination of cellular, Bluetooth ®, and satellite communications and web-based data management technologies,
our Logistics Visibility product family provides shippers and carriers with tools to better manage their tractors, drivers, trucks,
refrigerated (Reefer) trailers, dry van trailers, chassis and container fleets. Our Logistics Visibility solutions enable quick
access to actionable intelligence that results in better utilization, control, safety, compliance, and security of our customers’
freight-carrying assets.
Our
Logistics Visibility solutions consist of a combined hardware and software as a service solution that are designed to focus on
providing robust IoT monitoring, measuring, and management of the following asset types:
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Tractors
(e.g. Class 7-8 Vehicles): Our solutions sit in the “cab” of the truck. They are designed to be regulatory
compliant (e.g. Electronic Logging Devices or ELDs) solutions that provide real-time position reports, workflow management,
inspection reporting, engine performance information, two-way communication with the driver, and full Transportation Management
System (TMS) integration.
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Dry
Van Trailers: By using asset tracking technology that leverages solar-powered super-capacitors and long-lasting batteries,
along with options connected to external power, we offer a variety of mobility platforms that vary by power source and price
to provide extended years of maintenance-free asset tracking and IoT performance. Our FreightCAM cargo sensor
camera takes actual high definition pictures of the cargo in the dry van trailer and using machine learning can determine
cube, floor space, how the trailer is loaded, identify load shifts, and help our customer’s customer know how to unload
the cargo.
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Refrigerated
Trailers / Containers: Our reefer mobility platform is integrated with all major refrigeration unit brands and sensors
to allow complete remote two-way control combined with powerful dashboard and in easy-to-read reports on the status of cold
chain products and cargo. Our system allows our customers to proactively manage their reefer loads versus other solutions
that merely monitor temperature.
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Chassis:
We provide multiple interoperable mobility platform options, which vary by power source and price, for continuous real-time
visibility of these assets while in transit, as well as more accurate arrival and departure information to better plan supply
chain resource allocation. Our new weight-on-axle sensor and our algorithms for determining if the chassis has a container
on it or not enable our customers to better optimize chassis utilization and improve their billing for chassis rentals.
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Shipping
Containers: We deliver full visibility of containers from the moment they are moved from the yard to the instant they
reach their final destination to increase container utilization and reduce transit cycle times. Our container solutions also
integrate with our FreightCAM enabling our container customers to get the same benefits as our dry van customers.
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Cargo:
Images, door sensors, and ‘cargo-area’ environmental sensors (temperature, humidity, shock, etc.) for true
freight visibility, root cause analysis for claims - including location and visual proof. We have unique and patent pending
machine learning processes that can determine volume, load status, shifts in transit and help consignees know how to plan
for unloading cargo.
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To
increase asset utilization, our Logistics Visibility solutions can improve overall operating efficiency, increase revenue per
mile, reduce claims and claims processing times, and reduce the number of assets needed by delivering our customers. This is achieved
through proving such things as two-way integrated workflows for drivers, control assignments and work change, Electronic Driver
Logging (ELD) and inspections for regulatory compliance, monitoring of asset pools and geofence violations, and various reporting
insights that flag under-utilized assets, the closest assets, and alerts on exceeding the allotted time for loading and unloading.
To
better control remote assets, our Logistics Visibility solutions provide our customers with technology that enables the identification
of a change in cargo status, geo-fencing alerts when an asset is approaching or leaving its destination, and on-board intelligence
utilizing a motion sensor and proprietary logic that identifies the beginning of a drive and the end of a drive.
Lastly,
to help improve asset and cargo security, our Logistics Visibility solutions allow our customers to enable things such as asset
lockdown with automated e-mail or text message, emergency tracking of assets (higher frequency of reports) if theft is expected,
geo-fencing alerts when an asset enters a prohibited geography or location, and near real-time sensors that alert based on changes
in temperature and shock, among other things.
PowerFleet
for Vehicles (includes automotive, rental, smaller service and delivery vans)
Our
PowerFleet for Vehicles solutions are designed both to enhance the vehicle fleet management process, whether it’s a rental
car, a private fleet, or automotive original equipment manufacturer, or OEM, partners. We achieve this by providing critical information
that can be used to increase revenues, reduce costs and improve customer service.
For
example, our rental fleet management system automatically uploads vehicle identification number, mileage and fuel data as a vehicle
enters and exits the rental lot, which can significantly expedite the rental and return processes for travelers, and provide the
rental company with more timely inventory status, more accurate billing data that can generate higher fuel-related revenue, and
an opportunity to utilize customer service personnel for more productive activities, such as inspecting vehicles for damage and
helping customers with luggage.
Our
solution for “car sharing” permits a rental car company to remotely control, track and monitor their rental vehicles
wherever they are parked. Whether for traditional “pod-based” rental or for the emerging rent-anywhere model, the
system, through APIs integrated into any rental company’s fleet management system, (i) manages member reservations by smart
phone or Internet, and (ii) charges members for vehicle use by the hour.
For
our customers with a variety of make-model-years in their fleet, we have developed an unmatched library of certified vehicle code
interfaces through our second-generation On-Board Diagnostics, or OBD-II, industry standard. Our patented fleet management system
helps fleet owners improve asset utilization, reduce capital costs, and cut operating expenses, such as vehicle maintenance or
service and support.
Our
fleet management solutions allow our customers to monitor their fleet vehicles using a web-based application that can monitor
various parameters, including but not limited to, vehicle location, speed, engine fault codes, driver behavior, eco-driving, and
ancillary sensors and can receive reports and alerts, either automatically or upon request wirelessly via the internet, email,
mobile phone or an SMS.
We
also provide stolen vehicle retrieval, or SVR, services, predominantly in Israel. Most of the SVR products used to provide our
SVR services are mainly sold to (i) local car dealers and importers that in turn sell the products equipped in the vehicle to
the end users who purchase the SVR services directly from us, or (ii) leasing companies which purchase our SVR services in order
to secure their own vehicles. In addition, in order to increase the added value services for our car dealer customers and end
users, we have developed a connected car solution which we provide based on the car infotainment system, which as of the date
of this report, is offered by us in Israel only. While the connected car solution enables the car dealer to preserve continuance
relationship with the end users, it provides the end users with a friendlier and richer user interface and enables us to expand
our consumer target market to vehicles which do not require SVR services.
Analytics
and Machine Learning
Our
analytics platforms provide our customers with a holistic view of their asset activity across their enterprise. For example, in
our PowerFleet for Logistics solutions, our image machine learning system allows us to process images from our freight camera
and other sources and identify key aspects of operations and geospatial information such as location, work being accomplished,
type of cargo, how cargo is loaded and if there are any visible issues such as damage.
Our
cloud-based software applications provide a single, integrated view of industrial asset activity across multiple locations, generating
enterprise-wide benchmarks, peer-industry comparisons, and deeper insights into asset operations. This enables management teams
to make more informed, effective decisions, raise asset performance standards, increase productivity, reduce costs, and enhance
safety.
Specifically,
our analytics platforms allow users to quantify best-practice enterprise benchmarks for industrial asset utilization and safety,
reveal variations and inefficiencies in asset activity across both sites and geographic regions, or identify opportunities to
eliminate or reallocate assets, to reduce capital and operating costs.
We
look for analytics and machine learning to make a growing contribution to drive platform and SaaS revenue, further differentiate
our offerings and add value to our solutions, and help keep us at the forefront of the wireless mobility markets we serve, although
there can be no assurance if and to what extent analytics will do so. We also use our analytics platform for our own internal
platform quality control.
Services
Hosting
Services. We provide the use of our systems as a remotely hosted service, with the system server and application software
residing in our colocation center or on a cloud platform provider’s infrastructure (e.g., Azure, AWS). This approach helps
us reduce support costs and improve quality control. It separates the system from the restrictions of the customers’ local
IT networks, which helps reduce their system support efforts and makes it easier for them to receive the benefits of system enhancements
and upgrades. Our hosting services are typically offered with extended maintenance and support services over a multi-year term
of service, with automatic renewals following the end of the initial term.
Software
as a Service. We provide system monitoring, help desk technical support, escalation procedure development, routine diagnostic
data analysis and software updates services as part of the ongoing contract term. These services ensure deployed systems remain
in optimal performance condition throughout the contract term and provide access to newly developed features and functions on
an annual basis.
Maintenance
Services. We provide a warranty on the hardware components of our system. During the warranty period, we either replace or
repair defective hardware. We also make extended maintenance contracts available to customers and offer ongoing maintenance and
support on a time and materials basis.
Customer
Support and Consulting Services. We have developed a framework for the various phases of system training and support that
offer our customers both structure and flexibility. Major training phases include hardware installation and troubleshooting, software
installation and troubleshooting, “train-the-trainer” training on asset hardware operation, preliminary software user
training, system administrator training, information technology issue training, ad hoc training during system launch and advanced
software user training.
Increasingly,
training services are provided through scalable online interactive training tools. Support and consulting services are priced
based on the extent of training that the customer requests. To help our customers derive the most benefit from our system, we
supply a broad range of documentation and support including videos, interactive online tools, hardware user guides, software manuals,
vehicle installation overviews, troubleshooting guides, and issue escalation procedures.
We
provide our consulting services both as a stand-alone service to study the potential benefits of implementing a wireless fleet
management system and as part of the system implementation itself. In some instances, customers prepay us for extended maintenance,
support and consulting services. In those instances, the payment amount is recorded as deferred revenue and revenue is recognized
over the service period.
Growth
Strategy
Our
objective is to become a leading global provider of wireless solutions for managing and securing enterprise assets. To achieve
this goal, we intend to increase sales in existing markets to existing customers and pursue opportunities with new customers by:
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focusing
our business solutions by vertical markets and go to market strategies to each market;
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positioning
ourselves as an innovative thought leader;
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maintaining
a world class sales and marketing team;
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identifying,
seizing, and managing revenue opportunities;
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expanding
our customer base and achieving wider market penetration;
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implementing
improved marketing, sales and support strategies;
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shortening
our initial sales cycles by helping our customers through:
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identifying
and quantifying benefits expected from our solutions;
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accelerating
transitions from implementation to roll-out; and
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building
service revenue through long-term SaaS contracts;
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differentiating
our product offering through analytics, machine learning, unique sensors, and value added services;
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producing
incremental revenue at a high profit margin; and
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developing
channel partners.
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We
also plan to expand into new applications and markets by:
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pursuing
opportunities to integrate our system with computer hardware and software vendors, including:
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Original
Equipment Manufacturers or OEMs;
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transportation
management systems;
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warehouse
management systems;
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labor
and timecard systems;
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enterprise
resource planning; and
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yard
management systems.
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establishing
relationships with global distributors; and
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evaluating
and pursuing strategically sound acquisitions of companies.
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Sales
and Marketing
Our
sales and marketing objectives are to achieve broad market awareness and penetration, with an emphasis both on expanding business
opportunities with existing customers and on securing new customers.
We
market our systems directly to commercial and government organizations and through indirect sales channels, such as OEMs, vehicle
importers, distributors, and industrial equipment dealers.
In
addition, we are actively pursuing strategic relationships with key companies in our target markets - including complementary
hardware and software vendors and service providers - to further penetrate these markets by embedding our products in the assets
our systems monitor and integrating our solutions with other systems.
We
sell our systems to corporate-level executives, division heads and site-level management within the enterprise. Typically, our
initial system deployment serves as a basis for potential expansion across the customer’s organization.
We
work closely with customers to prove out an ROI, which is usually less than 12 months, and help maximize the utilization and benefits
of our system and demonstrate the value of enterprise-wide deployments. Post-implementation, we consult with our customers to
further extend and customize the benefits to the enterprise by delivering enhanced analytics capabilities.
Customers
We
market and sell our wireless solutions to a wide range of customers in the commercial and government sectors. Our customers operate
in diverse markets, such as automotive manufacturing, retail, food and grocery distribution, logistics, shipping, freight transportation,
heavy industry, wholesale distribution, manufacturing, aerospace and vehicle rental.
We
enter into master agreements with our customers in the normal course of business. These agreements define the terms of any sales
of products and/or services by us to the applicable customer, including, but not limited to, terms regarding payment, support
services, termination and assignment rights. These agreements generally obligate us only when products or services are actually
sold to the customer thereunder.
We
strive to establish long-term relationships with our customers in order to maximize opportunities for new application development
and increased sales. Some of our global customers that benefit from the Company’s combined solutions to power their specific
IoT and M2M mobility needs include Avis, Junghenrich, Walmart, Toyota, and XPO Logistics. No individual customer generates revenue
equal to or greater than 10% of the Company’s consolidated total revenue.
Competition
The
market for our solutions is rapidly evolving, highly competitive and fragmented. Our target markets are also subject to quickly
changing product technologies, shifting customer needs, regulatory requirements and frequent introductions of new products and
services.
In
each of our global markets, we encounter different competitors due to the dynamics of each market. A significant number of companies
have developed or are developing and marketing software and hardware for wireless products that currently compete or will compete
directly with our solutions. We compete with organizations varying in size, including many small, start-up companies as well as
large, well-capitalized organizations.
While
some of our competitors focus exclusively on providing wireless asset management solutions, many are involved in wireless technology
as an extension of a broader business. Many of our larger competitors are able to dedicate extensive financial resources to the
research and development and deployment of wireless solutions. As government and commercial entities expand the use of wireless
technologies, we expect that competition will continue to increase within our target markets.
Research
and Development
Our
research and development team has expertise in areas such as hardware, software and firmware development and testing, database
design and data analytics, wireless communications, artificial intelligence methods, mechanical and electrical engineering, and
both product and project management. In addition, we utilize external contractors to supplement our team in the areas of software
and firmware development, digital design, test development and product-level testing.
Generally,
our research and development efforts are focused on expanding the capabilities of our products, differentiating our offerings,
simplifying the implementation, support and utilization of our solutions, reducing the cost of our solutions, increasing the reliability
of our solutions, expanding the functionality of our solutions to meet customer and market requirements, applying new advances
in technology to enhance existing solutions, and building further competitive advantages through our intellectual property portfolio.
In
2020, we focused our research and development investments in several key areas:
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Continuously
innovating our diverse asset product line with next level ruggedized packaging, longer-life
power management and multiple communication modes including proprietary RF, Bluetooth
®, cellular, WiFi, and satellite;
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Minimizing
installation time and maximizing vehicle interaction and data extraction through advanced
auto-can detection capabilities;
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Continuing
to work on new product functionality for PowerFleet for Vehicles solutions, including
key new features that enable expanded fleet management, car rental and car sharing capabilities;
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Adding
new mobility platforms to support off-site, transient and leased asset models for industrial
equipment;
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Commercializing
smart container and chassis solutions for weight detection capabilities including bare,
mounted, loaded and various states of weight measurement for improved utilization and
billing;
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Applying
new machine learning and artificial intelligence algorithms to support cargo load assessment,
human image detection, fuel card funds verification of location and vehicle and crash
clustering for more automated incident detection and management;
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Continuously
enhancing our in-cab solutions to address ELD regulatory requirements and focus on ease
of use;
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Applying
human factors to the user experience and user interface (UX/UI) enhancements for end
user device interaction;
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Adding
new video capabilities for driver coaching, safety adherence and incident exoneration;
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Advancing
our edge computing differentiation by designing and developing unique sensors that include
image capture and weight sensing;
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Optimizing
reporting solutions through the introduction of new BI tools across our platforms, to
quantify and simplify customer benefit achievement, within a single deployed facility,
across an enterprise, and compared to peers within the same industry.
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Intellectual
Property
Patents
We
attempt to protect our technology and products through a variety of intellectual property protections, including the pursuit of
patent protection in the United States and certain foreign jurisdictions. Because of the differences in patent laws and laws concerning
proprietary rights, the extent of protection provided by U.S. patents or proprietary rights owned by us may differ from that of
their foreign counterparts. Where strategically appropriate, we will attempt to pursue suspected violators of our patents and,
whenever possible, monetize our intellectual property.
We
built a portfolio of patents and patent applications relating to various aspects of our technology products and solutions. As
of March 3, 2021, our patent portfolio includes 43 U.S. patents, 5 pending U.S. patent applications, 3 pending foreign international
applications, and 2 foreign patents. With the timely payment of all maintenance fees, the U.S. patents have expiration dates falling
between 2021 and 2038. No single patent or patent family is considered material to our business.
Trademarks
We
have, or have applied for, U.S. and/or foreign trademark protection for POWERFLEET®, POWERFLEET VISION®, POWERFLEET
IQ®, POWRFLEET YARD®, I.D. SYSTEMS® and Design, the I.D. SYSTEMS Logo®,
VEHICLE ASSET COMMUNICATOR®, VERIWISE IQ®, ASSET INTELLIGENCE®, didBOX®,
FREIGHTCAM, KEYTROLLER®, REEFERMATE®, POINTER® and Design, and CELLOCATOR®
and Design.
We
attempt to avoid infringing known proprietary rights of third parties in our product development and sales efforts. However, it
is difficult to proceed with certainty in a rapidly evolving technological environment in which there may be numerous patent applications
pending, many of which are confidential at the time of the application filing, with regard to similar technologies. If we were
to discover that our products violate third-party proprietary rights, we may not be able to:
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obtain
licenses to continue offering such products without substantial reengineering;
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re-engineer
our products successfully to avoid infringement;
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obtain
licenses on commercially reasonable terms, if at all;
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litigate
an alleged infringement successfully; or
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settle
without substantial expense and damage awards.
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Any
claims against us relating to the infringement of third-party proprietary rights, even if without merit, could result in the expenditure
of significant financial and managerial resources or in injunctions preventing us from distributing certain products. Such claims
could materially adversely affect our business, financial condition and results of operations.
Our
software products are susceptible to unauthorized copying and uses that may go undetected, and policing such unauthorized use
is difficult. In general, our efforts to protect our intellectual property rights through patent, copyright, trademark and trade
secret laws and contractual safeguards may not be effective to prevent misappropriation of our technology, or to prevent the development
and design by others of products or technologies similar to, or competitive with, those developed by us. Our failure or inability
to protect our proprietary rights could materially and adversely affect our business, financial condition and results of operations.
Manufacturing
We
outsource our hardware manufacturing operations to contract manufacturers. This strategy enables us to focus on our core competencies
- designing hardware and software systems and delivering solutions to customers - and avoid investing in capital-intensive electronics
manufacturing infrastructure. Outsourcing also provides us with the ability to ramp up deliveries to meet increases in demand
without increasing fixed expenses.
Our
manufacturers are responsible for obtaining the necessary components and supplies to manufacture our products. While components
and supplies are generally available from a variety of sources, manufacturers generally depend on a limited number of suppliers.
In the past, unexpected demand for communication products has caused worldwide shortages of certain electronic parts and allocation
of such parts by suppliers that had an adverse impact on the ability of manufacturers to deliver products as well as on the cost
of producing such products.
Due
to the general availability of manufacturers for our products, we do not believe that the loss of any of our manufacturers would
have a long-term material adverse effect on our business, although there could be a short-term adverse effect on our business.
We
generally attempt to maintain sufficient inventory to meet customer demand for products, as well as to meet anticipated sales
levels. If our product mix changes in unanticipated ways, or if sales for particular products do not materialize as anticipated,
we may have excess inventory or inventory that becomes obsolete. In such cases, our operating results could be negatively affected.
Government
Regulations
The use of radio emissions is subject to regulation in the United States by various federal agencies,
including the Federal Communications Commission, or FCC, and the Occupational Safety and Health Administration, or OSHA.
Various state agencies also have promulgated regulations which concern the use of lasers and radio/electromagnetic emissions
standards.
Regulatory
changes in the United States and other countries in which we may operate in the future could require modifications to some of
our products in order for us to continue manufacturing and marketing our products in those areas.
Our
products intentionally transmit radio signals, including narrow band and spread spectrum signals, as part of their normal operation.
We have obtained certification from the FCC for our products that require certification. Users of these products in the United
States do not require any license from the FCC to use or operate our products. To market and sell our integrated wireless solutions
in the European Union, we also utilize unlicensed radio spectra, and have obtained the required European Norm (EN) certifications.
In
addition, some of our operations use substances regulated under various federal, state and local laws governing the environment
and worker health and safety, including those governing the discharge of pollutants into the ground, air and water, the management
and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Certain of our products are subject to
various federal, state and local laws governing chemical substances in electronic products.
The
adoption of unfavorable regulations, or unfavorable interpretations of existing regulations by courts or regulatory bodies, could
require us to incur significant compliance costs, cause the development of the affected markets to become impractical or otherwise
adversely affect our ability to produce or market our products.
Since
1996, our subsidiary Pointer has held an operational license, which is renewed on a regular basis, from the Ministry of Communications
in Israel to operate our wireless messaging system over 2 MHz in the 966 to 968MHz radio spectrum band.
Our
subsidiary Pointer Argentina S.A. (“Pointer Argentina”) obtains domestic licenses for the deployment of our SVR operation
in Argentina and local operators are required to obtain a specific license for their operations.
We
are currently registered by the Federal Department of Security (SEGOB) in Mexico to provide our services.
Our
subsidiary Pointer SA (PTY) Ltd. (“Pointer South Africa”) is currently registered as a security service provider under
the Private Security Industry Regulation Act, 2001 in South Africa. Our products are also listed with ICASA (Independent Communications
Authority of South Africa).
Our
Cellocator division obtains licenses from the Israeli Ministry of Communications in order to manufacture, import, market and sell
its products in Israel.
While
the use of our cellular monitoring units does not require regulatory approvals, in Israel, the use of our radio frequency products
is subject to regulatory approvals from government agencies. In general, applications for regulatory approvals to date have not
been problematic. This being said, we cannot guarantee that approvals already obtained are or will remain sufficient in the view
of regulatory authorities indefinitely.
Employees
As
of March 1, 2021, we had 772 full-time employees across the globe. We believe that our relationships with our employees is good.
Other
Information
I.D.
Systems, Inc. was incorporated in the State of Delaware in 1993. PowerFleet, Inc. was incorporated in the State of Delaware in
February 2019 for the purpose of effectuating the Transactions. Upon the closing of the Transactions, PowerFleet became the parent
entity of I.D. Systems and Pointer.
Our
primary website is www.powerfleet.com. We make available on this website, free of charge, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material with, or furnish such information to, the Securities
and Exchange Commission (“SEC”). We also make available on this website, free of charge, our Code of Ethics for Senior
Financial Officers, which applies to our principal executive officer, principal financial officer and principal accounting officer.
Item
1A. Risk Factors.
In
addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be considered
carefully in evaluating the Company’s business. Our business, financial condition or results of operations could be materially
and adversely affected by any of these risks. Additional risks not presently known to the Company or that the Company currently
deems immaterial may also adversely affect our business, financial condition or results of operations.
Risk
Factor Summary:
Our
business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors”
immediately following this summary. These risks include, among others, the following:
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We
may not realize the anticipated benefits and cost savings of the Transactions.
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Integrating
I.D. Systems’ and Pointer’s businesses may be more difficult, time-consuming
or costly than expected.
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We
have incurred significant losses and have a substantial accumulated deficit. If we cannot
achieve profitability, the market price of our common stock could decline significantly.
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We
may not be able to successfully execute our strategic initiatives or meet our long-term
financial goals.
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We
are an international company and may be susceptible to a number of political, economic
and geographic risks that could harm our business.
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Conditions
and changes in the global economic environment may adversely affect our business and
financial results.
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We
expect that the impact of COVID-19 will continue to adversely affect our business, results
of operations and financial condition.
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We
may need to obtain additional capital to fund our operations that could have negative
consequences on our business.
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If
the market for our technology does not develop or become sustainable, expands more slowly
than we expect or becomes saturated, our revenues will decline and our financial condition
and results of operations could be materially and adversely affected.
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If
we are unable to keep up with rapid technological change, we may be unable to meet the
needs of our customers, which could materially and adversely affect our financial condition
and results of operations and reduce our ability to grow our market share.
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We
may incur additional charges for excess and obsolete inventory, which could adversely
affect our cost of sales and gross profit.
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The
long and variable sales cycles for our solutions may cause our revenues and operating
results to vary significantly from quarter to quarter or year to year.
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We
rely significantly on channel partners to sell our products, and disruptions to, or our
failure to develop and manage our channel partners would harm our business.
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If
we are unable to protect our intellectual property rights, our financial condition and
results of operations could be materially and adversely affected.
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We
may become involved in an intellectual property dispute that could subject us to significant
liability and divert the time and attention of our management and prevent us from selling
our products.
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The
U.S. government’s right to use technology developed by us with government funds
could limit our intellectual property rights.
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We
rely on subcontractors to manufacture and deliver our products.
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Our
manufacturers rely on a limited number of suppliers for several significant components used in our products.
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The
industry in which we operate is highly competitive, and competitive pressures from existing
and new companies could have a material adverse effect on our financial condition and
results of operations.
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The
federal government or independent standards organizations may implement significant regulations
or standards that could adversely affect our ability to produce or market our products.
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Because
our products are complex, they may have undetected errors or failures when they are introduced,
which could seriously harm our business, and our product liability insurance may not
adequately protect us.
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We
may be subject to breaches of our information technology systems, which could damage
our reputation, vendor, and customer relationships, and our customers’ access to
our services.
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Changes
in practices of insurance companies in the markets in which we provide and sell our SVR
services and products could adversely affect our revenues and growth potential.
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A
decline in sales of consumer or commercial vehicles in the markets in which we operate
could result in reduced demand for our products and services.
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A
reduction in vehicle theft rates may adversely impact demand for our SVR services and
products.
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The
increasing availability of handheld GPRS devices may reduce the demand for our products
for small fleet management.
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The
use of our products is subject to international regulations.
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The
adoption of industry standards that do not incorporate the technology we use may decrease
or eliminate the demand for our services or products and could harm our results of operations.
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Our
financial statements may not reflect certain payments we may be required to make to employees.
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Some
of our employees in our subsidiaries are members of labor unions and a dispute between
us and any such labor union could result in a labor strike that could delay or preclude
altogether our ability to generate revenues in the markets where such employees are located.
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Under
the current laws in jurisdictions in which we operate, we may not be able to enforce
non-compete covenants and therefore may be unable to prevent our competitors from benefiting
from the expertise of some of our former employees.
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Manufacturing
of many of our products is highly complex, and an interruption by suppliers, subcontractors
or vendors could adversely affect our business, financial condition or results of operations.
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Our
Israeli subsidiaries have incurred significant indebtedness to finance the Transactions.
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The
terms of the Credit Agreement restrict PowerFleet Israel’s and Pointer’s
current and future operations, particularly their ability to respond to changes or to
take certain actions.
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If
we lose our executive officers, or are unable to recruit additional personnel, our ability
to manage our business could be materially and adversely affected.
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We
provide no assurance that we will be able to successfully integrate any businesses, products,
technologies or personnel that we have acquired or might acquire in the future.
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The
unpredictability of our quarterly operating results could adversely affect the market
price of our common stock.
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We
provide financing to our customers for the purchase of our products, which may increase
our credit risks in the event of a deterioration in a customer’s financial condition
or in global credit conditions.
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Interest
rate fluctuations may adversely affect our income and results of operations.
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Our
cash and cash equivalents could be adversely affected by a downturn in the financial
and credit markets.
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Goodwill
impairment or intangible impairment charges may affect our results of operations in the
future.
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Holders
of our Series A Preferred Stock can exercise significant control over the Company, which
could limit the ability of our stockholders to influence the outcome of key transactions,
including a change of control.
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The
Series A Preferred Stock has rights, preferences and privileges that are not held by,
and are preferential to, the rights of holders of our common stock, which could adversely
affect our liquidity and financial condition, and may result in the interests of the
holders of Series A Preferred Stock differing from those of the holders of our common
stock.
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Any
issuance of our common stock upon conversion of the Series A Preferred Stock will cause
dilution to then existing Company stockholders and may depress the market price of our
common stock.
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The
concentration of common stock ownership among our executive officers and directors could
limit the ability of other stockholders of the Company to influence the outcome of corporate
transactions or other matters submitted for stockholder approval.
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Future
sales of our common stock, including sales of our common stock acquired upon the exercise
of outstanding options, may cause the market price of our common stock to decline.
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The
issuance of equity or debt securities under our shelf registration statement could have
a negative impact on the price of our common stock.
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Our
Charter provides that the Court of Chancery of the State of Delaware will be the exclusive
forum for certain legal actions between us and our stockholders, which could limit stockholders’
ability to obtain a judicial forum viewed by the stockholders as more favorable for disputes
with us or our directors, officers or employees, and the enforceability of the exclusive
forum provision may be subject to uncertainty.
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The
Charter contains a provision renouncing our interest and expectancy in certain corporate
opportunities which may prevent us from receiving the benefit of certain corporate opportunities.
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Provisions
of Delaware law or the Charter could delay or prevent an acquisition of the Company,
even if the acquisition would be beneficial to our stockholders, and could make it more
difficult for stockholders to change our management.
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Risks
Related to the Transactions:
We
may not realize the anticipated benefits and cost savings of the Transactions.
The
success of the Transactions will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining
I.D. Systems’ and Pointer’s businesses. Our ability to realize these anticipated benefits and cost savings is subject
to certain risks, including, among others:
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our
ability to successfully combine I.D. Systems’ and Pointer’s businesses;
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the
risk that the combined businesses will not perform as expected;
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the
extent to which we will be able to realize the expected synergies, which include realizing potential savings from re-assessing
priority assets and aligning investments, eliminating duplication and redundancy, adopting an optimized operating model between
both companies and leveraging scale, and creating value resulting from the combination of I.D. Systems’ and Pointer’s
businesses;
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the
possibility that the aggregate consideration being paid for Pointer is greater than the value we will derive from the Transactions;
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the
possibility that the combined company will not achieve the free cash flow that we have projected;
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the
reduction of cash available for operations and other uses and the incurrence of indebtedness to finance the Transactions;
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the
assumption of known and unknown liabilities of Pointer, including potential tax and employee-related liabilities; and
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the
possibility of costly litigation challenging the Transactions.
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If
I.D. Systems and Pointer are not able to successfully integrate their businesses within the anticipated time frame, or at all,
the anticipated cost savings, synergies operational efficiencies and other benefits of the Transactions may not be realized fully
or may take longer to realize than expected, and the combined company may not perform as expected.
Integrating
I.D. Systems’ and Pointer’s businesses may be more difficult, time-consuming or costly than expected.
Prior
to completion of the Transactions, I.D. Systems and Pointer operated independently, and there can be no assurances that their
businesses can be integrated successfully. It is possible that the integration process could result in the loss of key employees,
the disruption of either company’s or both companies’ ongoing businesses or unexpected integration issues, such as
higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated.
Specifically, issues that must be addressed in integrating the operations of I.D. Systems and Pointer in order to realize the
anticipated benefits of the Transactions, so the combined business performs as expected include, among others:
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combining
the companies’ separate operational, financial, reporting and corporate functions;
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integrating
the companies’ technologies, products and services;
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identifying
and eliminating redundant and underperforming operations and assets;
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harmonizing
the companies’ operating practices, employee development, compensation and benefit programs, internal controls and other
policies, procedures and processes;
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addressing
possible differences in corporate cultures and management philosophies;
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maintaining
employee morale and retaining key management and other employees;
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attracting
and recruiting prospective employees;
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consolidating
the companies’ corporate, administrative and information technology infrastructure;
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coordinating
sales, distribution and marketing efforts;
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managing
the movement of certain businesses and positions to different locations;
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maintaining
existing agreements with customers and vendors and avoiding delays in entering into new agreements with prospective customers
and vendors;
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coordinating
geographically dispersed organizations; and
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effecting
potential actions that may be required in connection with obtaining regulatory approvals.
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In
addition, at times, the attention of certain members of our management and our resources may be focused on the integration of
the businesses of the two companies and diverted from day-to-day business operations, which may disrupt our business.
Risks
Related to Our Business:
We
have incurred significant losses and have a substantial accumulated deficit. If we cannot achieve profitability, the market price
of our common stock could decline significantly.
As
of December 31, 2020, we had cash (including restricted cash,) and cash equivalents of $18.4 million and working capital of $28.9
million. Our primary sources of cash are cash flows from operating activities, our holdings of cash, cash equivalents and investments
from the sale of our capital stock and borrowings under our credit facility. To date, we have not generated sufficient cash flow
solely from operating activities to fund our operations.
We
incurred net losses of approximately $5.8 million, $12 million, and $13.6 million for the years ended December 31, 2018, 2019
and 2020, respectively, and have incurred additional net losses since inception. At December 31, 2020, we had an accumulated deficit
of approximately $121.2 million. Our ability to increase our revenues from the sale of our products will depend on our ability
to successfully implement our growth strategy and the continued expansion of our markets. If our revenues do not grow or if our
operating expenses continue to increase, we may not be able to become profitable and the market price of our common stock could
decline.
We
may not be able to successfully execute our strategic initiatives or meet our long-term financial goals.
We
have been engaged in strategic initiatives to focus on our core business to maximize long-term stockholder value, to improve our
cost structure and efficiency and to increase our selling efforts and developing new business. We cannot provide any assurance
that we will be able to successfully execute these or other strategic initiatives or that we will be able to execute these initiatives
on our expected timetable. We may not be successful in focusing our core business and obtaining operational efficiencies or replacing
revenues lost as a result of these strategic initiatives.
We
are an international company and may be susceptible to a number of political, economic and geographic risks that could harm our
business.
We
are dependent on sales to customers outside the U.S. Our international sales are likely to account for a significant percentage
of our products and services revenue for the foreseeable future. As a result, the occurrence of any international, political,
economic or geographic event (for example, the recent outbreak of the novel coronavirus COVID-19) could result in a significant
decline in our revenue. In addition, compliance with complex foreign and U.S. laws and regulations that apply to our international
operations will increase our cost of doing business in international jurisdictions. These numerous and sometimes conflicting laws
and regulations include internal control and disclosure rules, data privacy and filtering requirements, anti-corruption laws,
such as the Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and anti-competition
regulations, among others. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against
us, our officers, or employees, prohibitions on the conduct of our business and on our ability to offer our products and services
in one or more countries, and could also materially affect our brand, international expansion efforts, ability to attract and
retain employees, business, and operating results. Although we plan to implement policies and procedures designed to ensure compliance
with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
Some
of the risks and challenges of doing business internationally include:
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unexpected
changes in regulatory requirements;
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fluctuations
in international currency exchange rates including its impact on unhedgeable currencies and our forecast variations for hedgeable
currencies;
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imposition
of tariffs and other barriers and restrictions;
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management
and operation of an enterprise spread over various countries;
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the
burden of complying with a variety of laws and regulations in various countries;
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application
of the income tax laws and regulations of multiple jurisdictions, including relatively low-rate and relatively high-rate jurisdictions,
to our sales and other transactions, which results in additional complexity and uncertainty;
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the
conduct of unethical business practices in certain developing countries;
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general
economic and geopolitical conditions, including inflation and trade relationships;
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war
and acts of terrorism;
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kidnapping
and high crime rate;
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natural
disasters or pandemics (for example, the recent outbreak of the novel coronavirus COVID-19);
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availability
of U.S. dollars especially in countries with economies highly dependent on resource exports, particularly oil; and
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changes
in export regulations.
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While
these factors and the impacts of these factors are difficult to predict, any one or more of them could adversely affect our business,
financial condition and results of operations in the future.
Conditions
and changes in the global economic environment may adversely affect our business and financial results.
The
global economy continues to be adversely affected by stock market volatility, tightening of credit markets, concerns of inflation
and deflation, adverse business conditions and liquidity concerns. These events and the related uncertainty about future economic
conditions could negatively impact our customers and, among other things, postpone their decision-making, decrease their spending
and jeopardize or delay their ability or willingness to make payment obligations, any of which could adversely affect our business
and results of operations. Uncertainty about current global economic conditions, in particular as a result of the recent outbreak
of the novel coronavirus COVID-19, could also cause volatility of our stock price. During periods of economic downturns, our customers
may decrease their demand for wireless technology solutions, as well as the maintenance, support and consulting services we provide.
This slowdown may have an adverse effect on the wireless solutions industry in general and on demand for our products and services,
but the magnitude of that impact is uncertain. Our future growth is dependent, in part, upon the demand for our products and services.
Prolonged weakness in the economy may cause business enterprises to delay or cancel wireless solutions projects, reduce their
overall wireless solutions budgets and/or reduce or cancel orders for our services. This, in turn, may lead to longer sales cycles,
delays in purchase decisions, and payment and collection issues, and may also result in price pressures, causing us to realize
lower revenues and operating margins. Additionally, if our customers cancel or delay their wireless solutions initiatives, our
business, financial condition and results of operations could be materially and adversely affected. If the current uncertainty
in the general economy does not change or continue to improve, our business, financial condition and results of operations could
be harmed.
In
addition, South African regulation of the private security industry may adversely affect our business. The Private Security Industry
Regulation Amendment Bill (the “Bill”) was approved by the National Assembly and the National Council of Provinces,
and has been awaiting, since March 2014, the final signature of the President of South Africa in order to go into effect. The
proposed Bill includes an amendment to existing South Africa law by requiring that in order to be registered as a security service
provider, a security business must have at least fifty-one percent (51%) of the ownership and control of the company exercised
by South African citizens. The Bill has yet to be signed by the President of South Africa and is currently contested by both South
African and international stakeholders. If the Bill becomes effective in its current form, in order to meet the new registration
requirements when applying for renewal of the registration of our South African operations, we would be forced to sell 39% of
our holdings in Pointer South Africa, which would adversely affect our South African operations.
The
international scope of our business exposes us to risks associated with foreign exchange rates.
We
report our financial results in U.S. dollars. However, a significant portion of our net sales, assets, indebtedness and other
liabilities, and costs are denominated in foreign currencies. These currencies include, among others, the Euro, Israeli shekel,
British pound sterling, Mexican peso, Argentine peso, Brazilian real and South African rand.
In
addition, several emerging market economies are particularly vulnerable to the impact of rising interest rates, inflationary pressures,
weaker oil and other commodity prices, and large external deficits. Risks in one country can limit our opportunities for growth
and negatively affect our operations in another country or countries. As a result, any such unfavorable conditions or developments
could have an adverse impact on our operations. Our results of operations and, in some cases, cash flows, have in the past been,
and may in the future be, adversely affected by movements in exchange rates. In addition, we may also be exposed to credit risks
in some of those markets. We may implement currency hedges or take other actions intended to reduce our exposure to changes in
foreign currency exchange rates. If we are not successful in mitigating the effects of changes in exchange rates on our business,
any such changes could materially impact our results.
We
expect that the impact of the global outbreak of COVID-19 will continue to adversely affect our business, results of operations
and financial condition.
The
global outbreak of a novel strain of coronavirus, COVID-19, and mitigation efforts by governments to attempt to control its spread,
has resulted in significant economic disruption and continues to adversely impact the broader global economy. COVID19 may
continue to negatively affect our future business, results of operations and financial condition. The duration and extent of the
impact of the pandemic on our business and financial results will depend largely on the future developments that cannot be accurately
predicted at this time, including the duration of the spread of the outbreak, the extent and effectiveness of containment actions
and the impact of these and other factors on capital and financial markets and the related impact on the financial circumstances
of our employees, customers, and suppliers. Given the scope and magnitude of the pandemic all of its direct and indirect consequences
are not yet known and may not emerge for some time.
We
may need to obtain additional capital to fund our operations that could have negative consequences on our business.
We
may require additional capital in the future to develop and commercialize additional products and technologies or take advantage
of other opportunities that may arise, including potential acquisitions. We may seek to raise the necessary funds through public
or private equity offerings, debt financings, additional operating improvements, asset sales or strategic alliances and licensing
arrangements. We have on file a shelf registration statement on Form S-3 that was declared effective by the SEC on November 27,
2019. The shelf registration statement allows us to raise up to an aggregate of $60.0 million from the sale of common stock, preferred
stock, warrants, debt securities and units or any combination of the foregoing. On May 14, 2020, we entered into an equity distribution
agreement for an “at-the-market offering” program (the “ATM Offering”) with Canaccord Genuity LLC (“Canaccord”)
as sales agent, pursuant to which we issued and sold an aggregate of 809,846 shares of common stock for approximately $4.2 million
in gross proceeds. We terminated the equity distribution agreement effective as of August 14, 2020. On February 1, 2021, we closed
an underwritten public offering (the “Underwritten Public Offering”) of 4,427,500 shares of common stock (which includes
the full exercise of the underwriters’ over-allotment option) for gross proceeds of approximately $28.8 million, before
deducting the underwriting discounts and commissions and other estimated offering expenses. The offer and sale of common stock
in the ATM Offering and the Underwritten Public Offering were made pursuant to our shelf registration statement.
To
the extent we raise additional capital by issuing equity securities, including pursuant to our shelf registration statement, our
existing stockholders may experience substantial dilution. In addition, we may be required to relinquish rights to our technologies
or systems, or grant licenses on terms that are not favorable to us in order to raise additional funds through strategic alliance,
joint venture and licensing arrangements. We cannot provide assurance that the additional sources of funds will be available,
or if available, would have reasonable terms. If adequate funds are not available, we may be required to delay, reduce the scope
of or eliminate one or more of our development programs, and our business, financial condition, results of operations and stock
price could be materially and adversely affected.
If
the market for our technology does not develop or become sustainable, expands more slowly than we expect or becomes saturated,
our revenues will decline and our financial condition and results of operations could be materially and adversely affected.
Our
success is highly dependent on the continued market acceptance of our solutions. The market for our products and services is new
and rapidly evolving. If the market for our products and services does not become sustainable, or becomes saturated with competing
products or services, our revenues will decline and our financial condition and results of operations could be materially and
adversely affected.
If
we are unable to keep up with rapid technological change, we may be unable to meet the needs of our customers, which could materially
and adversely affect our financial condition and results of operations and reduce our ability to grow our market share.
Our
market is characterized by rapid technological change and frequent new product announcements. Significant technological changes
could render our existing technology obsolete. We are active in the research and development of new products and technologies
and in enhancing our current products. However, research and development in our industry is complex and filled with uncertainty.
For example, it is common for research and development projects to encounter delays due to unforeseen problems, resulting in low
initial volume production, fewer product features than originally considered desirable and higher production costs than initially
budgeted, any of which may result in lost market opportunities. In addition, these new products may not adequately meet the requirements
of the marketplace and may not achieve any significant degree of market acceptance. If our efforts do not lead to the successful
development, marketing and release of new products that respond to technological developments or changing customer needs and preferences,
our revenues and market share could be materially and adversely affected. We may expend a significant amount of resources in unsuccessful
research and development efforts. In addition, new products or enhancements by our competitors may cause customers to defer or
forego purchases of our products. Any of the foregoing could materially and adversely affect our financial condition and results
of operations and reduce our ability to grow our market share.
We
may incur additional charges for excess and obsolete inventory, which could adversely affect our cost of sales and gross profit.
While
we strive to effectively manage our inventory, due to rapidly changing technology, and uneven customer demand, product cycles
tend to be short and the value of our inventory may be adversely affected by changes in technology that affect our ability to
sell the products in our inventory. If we do not effectively forecast and manage our inventory, we may need to write off inventory
as excess or obsolete, which in turn, can adversely affect our cost of sales and gross profit.
We
have previously experienced, and may in the future experience, reductions in sales of older generation products as customers delay
or defer purchases in anticipation of new product introductions. The reserves we have established for potential losses due to
obsolete inventory may, however, prove to be inadequate and may give rise to additional charges for obsolete or excess inventory.
The
long and variable sales cycles for our solutions may cause our revenues and operating results to vary significantly from quarter
to quarter or year to year, which could adversely affect the market price of our common stock.
We
expect that many customers who utilize our solutions will do so as part of a large-scale deployment of these solutions across
multiple or all divisions of their organizations. A customer’s decision to deploy our solutions throughout its organization
will involve a significant commitment of its resources. Accordingly, initial implementations may precede any decision to deploy
our solutions enterprise-wide. Throughout this sales cycle, we may spend considerable time and expense educating and providing
information to prospective customers about the benefits of our solutions.
The
timing of the deployment of our solutions may vary widely and will depend on the specific deployment plan of each customer, the
complexity of the customer’s organization and the difficulty of such deployment. Customers with substantial or complex organizations
may deploy our solutions in large increments on a periodic basis. Accordingly, we may receive purchase orders for significant
dollar amounts on an irregular and unpredictable basis. Because of our limited operating history and the nature of our business,
we cannot predict the timing or size of these sales and deployment cycles. Long sales cycles, as well as our expectation that
customers will tend to place large orders sporadically with short lead times, may cause our revenue and results of operations
to vary significantly and unexpectedly from quarter to quarter. These variations could materially and adversely affect the market
price of our common stock.
We
rely significantly on channel partners to sell our products, and disruptions to, or our failure to develop and manage our channel
partners would harm our business.
Recruiting
and retaining qualified channel partners and training them in our technology and product offerings requires significant time and
resources. In order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures
that support our channel, including investment in systems and training. Those processes and procedures may become increasingly
complex and difficult to manage as we grow our organization. We have no minimum purchase commitments from any of our channel partners,
and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours.
Our competitors may provide incentives to existing and potential channel partners to favor their products or to prevent or reduce
sales of our products. Our channel partners may choose not to offer our products exclusively or at all. Establishing relationships
with channel partners who have a history of selling our competitors’ products may also prove to be difficult. Our failure
to establish and maintain successful relationships with channel partners would harm our business and operating results.
If
we are unable to protect our intellectual property rights, our financial condition and results of operations could be materially
and adversely affected.
We
rely on a combination of patents, copyrights, trademarks, trade secrets and contractual measures to protect our intellectual property
rights. Third parties may seek to challenge, invalidate, circumvent or render unenforceable any patents or proprietary rights
owned by us. If such challenges are successful, our business will be materially and adversely affected.
Our
employees, consultants and advisors enter into confidentiality agreements with us that prohibit the disclosure or use of our confidential
information. We also have entered into confidentiality agreements to protect our confidential information delivered to third parties
for research and other purposes. Despite these efforts, we cannot assure you that we will be able to effectively enforce these
agreements or our confidential information will not be disclosed, that others will not independently develop substantially equivalent
confidential information and techniques or otherwise gain access to our confidential information or that we can meaningfully protect
our confidential information.
Disputes
may arise in the future with respect to the ownership of rights to any technology developed with advisors or collaborators. These
and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our systems,
or could require or result in costly and time-consuming litigation that may not be decided in our favor. Any such event could
materially and adversely affect our financial condition and results of operations.
Policing
the unauthorized use of our intellectual property is difficult, and we cannot assure you that the steps we have taken will prevent
unauthorized use of our technology or other intellectual property, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States. Accordingly, we may not be able to protect our proprietary rights against
unauthorized third party copying or use. If we are unsuccessful in protecting our intellectual property, we may lose any technological
advantages we have over competitors and our financial condition and results of operations could be materially and adversely affected.
We
may become involved in an intellectual property dispute that could subject us to significant liability, divert the time and attention
of our management and prevent us from selling our products, any of which could materially and adversely affect our financial condition
and results of operations.
In
recent years, there has been significant litigation in the United States and internationally involving claims of alleged infringement
of patents and other intellectual property rights. Litigation may be necessary to enforce our intellectual property rights, defend
ourselves against alleged infringement and determine the scope and validity of our intellectual property rights.
Any
such litigation, whether or not successful, could result in substantial costs, divert the time and attention of our management
and prevent us from selling our products. If a claim of patent infringement was decided against us, we could be required to, among
other things:
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pay
substantial damages to the party making such claim;
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stop
selling, making, having made or using products or services that incorporate the challenged intellectual property;
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obtain
from the holder of the infringed intellectual property right a license to sell, make or use the relevant technology, which
license may not be available on commercially reasonable terms, or at all; or
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redesign
those products or services that incorporate such intellectual property.
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The
failure to obtain the necessary licenses or other rights could preclude the sale, manufacture or distribution of our products
and could materially and adversely affect our financial condition and results of operations.
The
U.S. government’s right to use technology developed by us with government funds could limit our intellectual property rights.
We
have developed, and may in the future develop, improvements to our technology that are funded in part by the U.S. government.
As a result, we do not have the right to prohibit the U.S. government from using certain technologies developed by us with such
government funds or to prohibit third parties from using those technologies to provide products and services at the request of
the U.S. government. Although such government rights do not affect our ownership of the technology developed using such funds,
the U.S. government has the right to royalty-free use of technologies that we have developed under such contracts. We are free
to commercially exploit those government-funded technologies and may assert our intellectual property rights to seek to block
other non-government users thereof, but there is no assurance we can successfully do so.
We
rely on subcontractors to manufacture and deliver our products. Any quality or performance failures by our subcontractors or changes
in their financial condition could disrupt our ability to supply quality products to our customers in a timely manner, resulting
in business interruptions, increased costs, claims for damages, reputation damage and reduced revenue.
In
order to meet the requirements under our customer contracts, we rely on subcontractors to manufacture and deliver our products
to our customers. Any quality or performance failures by our subcontractors or changes in their financial or business condition
could disrupt our ability to supply quality products to our customers in a timely manner. If we are unable to fulfill orders from
our customers in a timely manner, we could experience business interruptions, increased costs, damage to our reputation and loss
of our customers. In addition, we may be subject to claims from our customers for failing to meet our contractual obligations.
Although we have several sources for production, the inability to provide our products to our customers in a timely manner could
result in the loss of customers and our revenues could be materially reduced. In addition, there is great competition for the
most qualified and competent subcontractors. If we are unable to hire qualified subcontractors, the quality of our services and
products could decline. Furthermore, third-party manufacturers in the electronic component industry are consolidating. The consolidation
of third-party manufacturers may give remaining manufacturers greater leverage to increase the prices that they charge, thereby
increasing our manufacturing costs. If this were to occur and we are unable to pass the increased costs onto our customers, our
profitability could be materially and adversely affected.
Our
manufacturers rely on a limited number of suppliers for several significant components and raw materials used in our products.
If we or our manufacturers are unable to obtain these components or raw materials on a timely basis, we will be unable to meet
our customers’ orders, which could reduce our revenues, subject us to claims for damages and adversely affect our relationships
with our customers.
We
rely on a limited number of suppliers for the components and raw materials used in our products. Although there are many suppliers
for most of our component parts and raw materials, we are dependent on a limited number of suppliers for many of our significant
components and raw materials. This reliance involves a number of significant risks, including:
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unavailability
of materials and interruptions in delivery of components and raw materials from our suppliers, which could result in manufacturing
delays; and
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fluctuations
in the quality and price of components and raw materials.
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We
currently do not have any long-term or exclusive purchase commitments with any of our suppliers. In addition, our suppliers may
enter into exclusive arrangements with our competitors, be acquired by our competitors, or stop selling their products or components
to us on commercially reasonable terms or at all. We may not be able to develop alternative sources for the components and raw
materials. Even if alternate suppliers are available to us or our manufacturers, identifying them is often difficult and time
consuming. If we or our manufacturers are unable to obtain an ample supply of product or raw materials from our existing suppliers
or alternative sources of supply, we may be unable to satisfy our customers’ orders, which could reduce our revenues, subject
us to claims for damages and adversely affect our relationships with our customers.
The
industry in which we operate is highly competitive, and competitive pressures from existing and new companies could have a material
adverse effect on our financial condition and results of operations.
The
industry in which we operate is highly competitive and influenced by the following:
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advances
in technology;
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new
product introductions;
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evolving
industry standards;
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product
improvements;
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rapidly
changing customer needs;
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intellectual
property invention and protection;
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marketing
and distribution capabilities;
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ability
to attract and retain highly skilled professionals;
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competition
from highly capitalized companies;
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entrance
of new competitors;
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ability
of customers to invest in information technology; and
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price
competition.
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The
products marketed by us and our competitors are becoming more complex. As the technological and functional capabilities of future
products increase, these products may begin to compete with products being offered by traditional computer, network and communications
industry participants that have substantially greater financial, technical, marketing and manufacturing resources than we do.
Although
we are not aware of any current competitors that provide the precise capabilities of our systems, we are aware of competitors
that offer similar approaches to address the customer needs that our products address. Those companies include both emerging companies
with limited operating histories and companies with longer operating histories, greater name recognition and/or significantly
greater financial, technical and marketing resources than ours.
We
attempt to differentiate our solutions by continuing to innovate and by offering a choice of communication mode, patented battery
management technology, sensor options, and installation configurations.
If
we do not keep pace with product and technology advances, including the development of superior products by our competitors, or
if we are unable to otherwise compete successfully against our competitors, there could be a material adverse effect on our competitive
position, revenues and prospects for growth. As a result, our financial condition and results of operations could be materially
and adversely affected.
The
federal government or independent standards organizations may implement significant regulations or standards that could adversely
affect our ability to produce or market our products.
Our
products transmit radio frequency waves, the transmission of which is governed by the rules and regulations of the FCC, as well
as other federal and state agencies. Our ability to design, develop and sell our products will continue to be subject to these
rules and regulations for the foreseeable future. In addition, our products and services may become subject to independent industry
standards. The implementation of unfavorable regulations or industry standards, or unfavorable interpretations of existing regulations
by courts or regulatory bodies, could require us to incur significant compliance costs, cause the development of the affected
products to become impractical or otherwise adversely affect our ability to produce or market our products. The adoption of new
industry standards applicable to our products may require us to engage in rapid product development efforts that would cause us
to incur higher expenses than we anticipated. In some circumstances, we may not be able to comply with such standards, which could
materially and adversely affect our ability to generate revenues through the sale of our products.
Because
our products are complex, they may have undetected errors or failures when they are introduced, which could seriously harm our
business, and our product liability insurance may not adequately protect us.
Technical
products like ours often contain undetected errors or failures when first introduced. Despite our efforts to eliminate these flaws,
there still may be errors or failures in our products, even after the commencement of commercial shipments. We provide a warranty
reserve at the time of shipment, which may not be sufficient to cover actual repair costs. Because our products are used in business-critical
applications, we could be subject to product liability claims if our systems fail to perform as intended. Even unsuccessful claims
against us could result in costly litigation and the diversion of management’s time and resources and could damage our reputation
and impair the marketability of our systems. Although we maintain insurance, there are no assurances that:
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our
insurance will provide adequate coverage against potential liabilities if our products cause harm or fail to perform as promised;
or
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adequate
product liability insurance will continue to be available to us in the future on commercially reasonable terms or at all.
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If
our insurance is insufficient to pay any product liability claims, our financial condition and results of operations could be
materially and adversely affected. In addition, any such claims could permanently injure our reputation and customer relationships.
We
may be subject to breaches of our information technology systems, which could damage our reputation, vendor, and customer relationships,
and our customers’ access to our services.
Our
business operations require that we use and store sensitive data, including intellectual property and proprietary business information
in our secure data centers and on our networks. We face a number of threats to our data centers and networks in the form of unauthorized
access, security breaches and other system disruptions. It is critical to our business strategy that our infrastructure remains
secure and is perceived by customers and partners to be secure. We require user names and passwords in order to access our information
technology systems. We also use encryption and authentication technologies to secure the transmission and storage of data. Despite
our security measures, our information technology systems may be vulnerable to attacks by hackers or other disruptive problems.
Any such security breach may compromise information used or stored on our networks and may result in significant data losses or
theft of our, our customers’, or our business partners’ intellectual property or proprietary business information.
A cybersecurity breach could negatively affect our reputation by adversely affecting the market’s perception of the security
or reliability of our products or services. In addition, a cyber-attack could result in other negative consequences, including
remediation costs, disruption of internal operations, increased cybersecurity protection costs, lost revenues or litigation, which
could have a material adverse effect on our business, results of operations and financial condition.
Changes
in practices of insurance companies in the markets in which we provide and sell our SVR services and products could adversely
affect our revenues and growth potential.
We
depend on the practices of insurance companies in the markets in which we provide our SVR services and sell our SVR products.
In Israel, which is our main SVR market, most of the insurance companies either mandate the use of SVR services and products for
certain cars, or their equivalent, as a prerequisite for providing insurance coverage to owners of certain medium and high-end
vehicles, or provide insurance premium discounts to encourage vehicle owners to subscribe to services and purchase products such
as ours. Therefore, we rely on insurance companies’ continued practice of accepting vehicle location and recovery technology
as a preferred security product.
If
any of these policies or practices changes, for regulatory or commercial reasons, or if market prices for these services fall,
revenues from sales of our SVR services and products, primarily in Israel, could decline, which could adversely affect our revenues
and growth potential.
A
decline in sales of consumer or commercial vehicles in the markets in which we operate could result in reduced demand for our
products and services.
Our
products are primarily installed before or immediately after the initial sale of private or commercial vehicles. Consequently,
a reduction in sales of new vehicles could reduce our market for services and products. New vehicle sales may decline for various
reasons, including an increase in new vehicle tariffs, taxes or gas prices, an increased difficulty in obtaining credit or financing
in the applicable local or global economy, or the occurrence of natural disasters or public health crises, such as the recent
outbreak of the novel coronavirus COVID-19. A decline in sales of new vehicles in the markets in which we operate could result
in reduced demand for our services and products.
A
reduction in vehicle theft rates may adversely impact demand for our SVR services and products.
Demand
for our SVR services and products, depends primarily on prevailing or expected vehicle theft rates. Vehicle theft rates may decline
as a result of various factors such as the availability of improved security systems, implementation of improved or more effective
law enforcement measures, or improved economic or political conditions in markets that have high theft rates. If vehicle theft
rates in some of, or entire of, our existing markets decline, or if insurance companies or our other customers believe that vehicle
theft rates have declined or are expected to decline, demand for our SVR services and products may decline.
The
increasing availability of handheld GPRS devices may reduce the demand for our products for small fleet management.
The
increasing availability of low-cost handheld GPRS devices and smartphones may result in a decrease in the demand for our products
by managers of small auto fleets or providers of low-level services. The availability of such devices has expanded considerably
in recent years. Any such decline in demand for our products could cause a decline in our revenues and profitability.
The
use of our products is subject to international regulations.
The
use of our products is subject to regulatory approvals of government agencies in each of the countries in which our systems are
operated, including Israel. Our operators typically must obtain authorization from each country in which our systems and products
are installed. While in general, operators have not experienced problems in obtaining regulatory approvals to date, the regulatory
schemes in each country are different and may change from time to time. We cannot guarantee that approvals, which our operators
have obtained, will remain sufficient in the view of regulatory authorities. In addition, we cannot assure you that third party
operators of our systems and products will obtain licenses and approvals in a timely manner in all jurisdictions in which we wish
to sell our systems or that restrictions on the use of our systems will not be unduly burdensome.
The
adoption of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services
or products and could harm our results of operations.
There
are no established industry standards in all of the businesses in which we sell our products. For example, vehicle location devices
may operate by employing various technologies, including network triangulation, GPS, satellite-based or network-based cellular
or direction-finding homing systems. The development of industry standards that do not incorporate the technology we use may decrease
or eliminate the demand for our services or products and we may not be able to develop new services and products that are in compliance
with such new industry standards on a cost-effective basis. If industry standards develop and such standards do not incorporate
our products and we are unable to effectively adapt to such new standards, such development could harm our results of operations.
Our
financial statements may not reflect certain payments we may be required to make to employees.
In
certain countries, we are not required to reflect future severance fees in our liabilities. In countries such as Argentina, Brazil
and Mexico, companies do not generally dedicate amounts to potential future severance payments. Nonetheless, in such cases, companies
must pay a severance payment in cash upon termination of employment. We also do not have a provision in our financial statements
for potential future severance payments in the above countries and instead such expenses are recorded when such payments are actually
made upon termination of employment. As a result, our financial statements may not adequately reflect possible future severance
payments.
Some
of our employees in our subsidiaries are members of labor unions and a dispute between us and any such labor union could result
in a labor strike that could delay or preclude altogether our ability to generate revenues in the markets where such employees
are located.
Some
of our employees in our subsidiaries are members of labor unions. If a labor dispute were to develop between us and our unionized
employees, such employees could go on strike and we could suffer work stoppage for a significant period of time. A labor dispute
can be difficult to resolve and may require us to seek arbitration for resolution, which can be time-consuming, distracting to
management, expensive and difficult to predict. The occurrence of a labor dispute with our unionized employees could delay or
preclude altogether our ability to generate revenues in the markets where such employees are located. In addition, labor disputes
with unionized employees may involve substantial demands on behalf of the unionized employees, including substantial wage increases,
which may not be correlated with our performance, thus impairing our financial results. Furthermore, labor laws applicable to
our subsidiaries may vary and there is no assurance that any labor disputes will be resolved in our favor.
Under
the current laws in jurisdictions in which we operate, we may not be able to enforce non-compete covenants and therefore may be
unable to prevent our competitors from benefiting from the expertise of some of our former employees.
We
currently have non-competition agreements with many of our employees. However, due to the difficulty of enforcing non-competition
agreements globally, not all of our employees in foreign jurisdictions have such agreements. These agreements generally prohibit
our employees, if they cease working for the Company, from directly competing with us or working for our competitors for a certain
period of time following termination of their employment agreements. Israeli courts have required employers seeking to enforce
non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm
one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of
a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be
caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
Manufacturing
of many of our products is highly complex, and an interruption by suppliers, subcontractors or vendors could adversely affect
our business, financial condition or results of operations.
Many
of our products are the result of complex manufacturing processes and are sometimes dependent on components with a limited source
of supply. As a result, we can provide no assurances that supply sources will not be interrupted from time to time. Furthermore,
our subcontractors or vendors may fail to obtain supply components and fail to deliver our products. As a result, a failure to
deliver by our subcontractors or vendors can result in decreased revenues. Such interruption or delay of our suppliers to deliver
components or interruption or delay of our vendors or subcontractors to deliver our products could affect our business, financial
condition or results of operations.
Our
Israeli subsidiaries have incurred significant indebtedness to finance the Transactions.
In
connection with the Transactions, PowerFleet Israel and Pointer entered into a credit agreement, dated August 19, 2019 (the “Credit
Agreement”), with Bank Hapoalim B.M. (“Hapoalim”), pursuant to which Hapoalim agreed to provide PowerFleet Israel
with two senior secured term loan facilities in an aggregate principal amount of $30,000,000 (comprised of two facilities in the
aggregate principal amount of $20,000,000 and $10,000,000) and a five-year revolving credit facility to Pointer in an aggregate
principal amount of $10,000,000. Such indebtedness will have the effect, among other things, of reducing PowerFleet Israel’s
and Pointer’s flexibility to respond to changing business and economic conditions, will increase our borrowing costs and,
to the extent that such indebtedness is subject to floating interest rates, may increase PowerFleet Israel’s and Pointer’s
vulnerability to fluctuations in market interest rates. The Credit Agreement requires PowerFleet Israel and Pointer to satisfy
various covenants, including negative covenants that directly or indirectly restrict our ability to engage in certain transactions
without the consent of the lender. The indebtedness is secured by first ranking and exclusive fixed and floating charges, including
by PowerFleet Israel over the entire share capital of Pointer and by Pointer over all of its assets, as well as cross guarantees
between PowerFleet Israel and Pointer. This may also make it more difficult for us to engage in future transactions without the
consent of the lender. The increased levels of indebtedness could also reduce funds available to fund efforts to integrate I.D.
Systems’ and Pointer’s businesses and realize expected benefits of the Transactions and/or engage in investments in
product development, capital expenditures and other activities and may create competitive disadvantages for us relative to other
companies with lower debt levels. We may be required to raise additional financing for working capital, capital expenditures,
acquisitions or other general corporate purposes. Our ability to arrange additional financing will depend on, among other factors,
our financial position and performance, as well as prevailing market conditions and other factors beyond its control. We cannot
assure you that we will be able to obtain additional financing on terms acceptable to us or at all.
The
terms of the Credit Agreement restrict PowerFleet Israel’s and Pointer’s current and future operations, particularly
their ability to respond to changes or to take certain actions.
The
Credit Agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on PowerFleet
Israel and Pointer and limit their ability to engage in acts that may be in their long-term best interest, including restrictions
on their ability to:
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incur
or guarantee additional indebtedness;
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incur
liens;
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sell
or otherwise dispose of assets;
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enter
into transactions with affiliates; and
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enter
into new lines of business.
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The
Credit Agreement also limits the ability of PowerFleet Israel and Pointer to consolidate or merge with or into another person.
In
addition, the covenants in the Credit Agreement require PowerFleet Israel and Pointer to maintain specified financial ratios,
tested quarterly. Their ability to meet those financial ratios can be affected by events beyond their control, and they may be
unable to meet them.
A
breach of the covenants or restrictions under the Credit Agreement could result in an event of default, which may allow the lender
to accelerate the indebtedness thereunder. In addition, an event of default under the Credit Agreement would permit the lender
to terminate all commitments to extend further credit pursuant to the revolving credit facility. Furthermore, if PowerFleet Israel
and Pointer are unable to repay the amounts due and payable under the Credit Agreement, the lender could proceed against the collateral
granted to it to secure the indebtedness under the Credit Agreement. In the event the lender accelerates the repayment of borrowings,
PowerFleet Israel and Pointer may not have sufficient assets to repay that indebtedness.
As
a result of these restrictions, we may be:
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limited
in our flexibility in planning for, or reacting to, changes in our business and the markets we serve;
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unable
to raise additional debt or equity financing to fund working capital, capital expenditures, new product development expenses
and other general corporate requirements; or
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unable
to compete effectively or to take advantage of new business or strategic acquisition opportunities.
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These
restrictions may affect our ability to grow in accordance with our strategy.
If
we lose our executive officers, or are unable to recruit additional personnel, our ability to manage our business could be materially
and adversely affected.
We
are dependent on the continued employment and performance of our executive officers. We currently do not have employment agreements
with any of our executive officers. Like other companies in our industry, we face intense competition for qualified personnel.
Many of our competitors have greater resources than we have to hire qualified personnel. Accordingly, if we are not successful
in attracting or retaining qualified personnel in the future, our ability to manage our business could be materially and adversely
affected.
We
provide no assurance that we will be able to successfully integrate any businesses, products, technologies or personnel that we
have acquired or might acquire in the future.
We
may, from time to time, continue to consider investments in or acquisitions of complementary companies, products or technologies.
In the event of any future acquisitions, we could:
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issue
stock that would dilute our current stockholders’ percentage ownership;
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incur
debt;
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assume
liabilities;
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incur
expenses related to the impairment of goodwill; or
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incur
large and immediate write-offs.
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We
may not be able to identify suitable acquisition candidates, and if we do identify suitable candidates, we may not be able to
make these acquisitions on acceptable terms, or at all.
Our
operation of any acquired business will also involve numerous risks, including:
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problems
integrating the acquired operations, personnel, technologies or products;
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unanticipated
costs;
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diversion
of management’s time and attention from our core businesses;
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adverse
effects on existing business relationships with suppliers and customers;
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risks
associated with entering markets in which we have no or limited prior experience; and
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potential
loss of key employees, particularly those of acquired companies.
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In
addition, if we make changes to our business strategy or if external conditions adversely affect our business operations, we may
be required to record an impairment charge for goodwill or intangibles, which would lead to decreased assets and reduced net operating
performance.
The
unpredictability of our quarterly operating results could adversely affect the market price of our common stock.
Our
revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside
of our control, and any of which could adversely affect the market price of our common stock. The main factors that may affect
us include the following:
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variations
in the sales of our products to our significant customers;
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variations
in the mix of products and services provided by us;
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the
timing and completion of initial programs and larger or enterprise-wide purchases of our products by our customers;
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the
length and variability of the sales cycle for our products;
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the
timing and size of sales;
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changes
in market and economic conditions, including fluctuations in demand for our products; and
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announcements
of new products by our competitors.
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As
a result of these and other factors, revenues for any quarter are subject to significant variation that could adversely affect
the market price for our common stock.
We
provide financing to our customers for the purchase of our products, which may increase our credit risks in the event of a deterioration
in a customer’s financial condition or in global credit conditions.
We
sell our products to a wide range of customers in the commercial and governmental sectors. We provide financing to customers for
a portion of such sales which could be in the form of notes or leases receivable over two to five years. Although these customers
are extended credit terms which are approved by us internally, our business could be materially and adversely affected in the
event of a deterioration of the financial condition of one or more of our customers that results in such customers’ inability
to repay us. This risk may increase during a general economic downturn affecting a large number of our customers or a widespread
deterioration in global credit conditions, and in the event our customers do not adequately manage their businesses or properly
disclose their financial condition.
Interest
rate fluctuations may adversely affect our income and results of operations.
As
of December 31, 2020, we had cash (including restricted cash) and cash equivalents of $18.4 million. In a declining interest rate
environment, reinvestment typically occurs at less favorable market rates, negatively impacting future investment income. Accordingly,
interest rate fluctuations may adversely affect our income and results of operations.
Our
cash and cash equivalents could be adversely affected by a downturn in the financial and credit markets.
We
maintain our cash and cash equivalents with major financial institutions; however, our cash and cash equivalent balances with
these institutions exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor on a systematic basis the
cash and cash equivalent balances in our operating accounts and adjust the balances as appropriate, these balances could be impacted
if one or more of the financial institutions with which we deposit our cash and cash equivalents fails or is subject to other
adverse conditions in the financial or credit markets. To date, we have experienced no loss of principal or lack of access to
our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents
will not be affected if the financial institutions in which we hold our cash and cash equivalents fail or the financial and credit
markets deteriorate.
Goodwill
impairment or intangible impairment charges may affect our results of operations in the future.
We
test goodwill for impairment on an annual basis and more often if events occur or circumstances change that would likely reduce
the fair value of a reporting unit to an amount below its carrying value. We also test for other possible acquisition intangible
impairments if events occur or circumstances change that would indicate that the carrying amount of such intangible may not be
recoverable. Any resulting impairment loss would be a non-cash charge and may have a material adverse impact on our results of
operations in any future period in which we record a charge.
Long-lived
assets with determinable useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Such charges could have a material adverse effect on our results of operations
in the period in which they are recorded.
We
have operations located in Israel, and therefore our results may be adversely affected by political, military and economic conditions
in Israel.
Our
subsidiaries PowerFleet Israel and Pointer operate in Israel, and therefore our business and operations may be directly influenced
by the political, economic and military conditions affecting Israel at any given time. A change in the security and political
situation in Israel could have a material adverse effect on our business, operating results and financial condition. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors,
including Hezbollah in Lebanon and Hamas in the Gaza Strip. In the last few years, these conflicts have involved missile strikes
against civilian targets in various parts of Israel, particularly in southern Israel where Pointer’s main offices and manufacturing
facility are located and have negatively affected business conditions in Israel. In addition, political uprisings and conflicts
in various countries in the Middle East, including Syria and Iraq, and including terrorist organizations gaining control and political
power in the region such as the Islamic State of Iraq and Syria, or ISIS, are affecting the political stability of those countries.
It is not clear how this instability will develop and how it will affect the political and security situation in the Middle East.
In
the event that our facilities are damaged as a result of hostile action or hostilities otherwise disrupt the ongoing operation
of our facilities or the airports and seaports on which we depend to import and export our supplies and products, our ability
to manufacture and deliver products to customers could be materially adversely affected. Additionally, the operations of our Israeli
suppliers and contractors may be disrupted as a result of hostile action or hostilities, in which event our ability to deliver
products to customers may be materially adversely affected.
Furthermore,
several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries
may impose restrictions on doing business with Israel and Israeli companies if hostilities or political instability in the region
continues or intensifies. These restrictions may limit materially our ability to obtain raw materials from these countries or
sell our products to companies in these countries. Any hostilities involving Israel or the interruption or curtailment of trade
between Israel and its present trading partners could have a material adverse effect on our business, operating results and financial
condition.
Any
downturn in the Israeli economy may also have a significant impact on our business. Israel’s economy has been subject to
numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980’s, low foreign exchange
reserves, fluctuations in world commodity prices, military conflicts and civil unrest. The revenues of certain of our products
and services may be adversely affected if fewer vehicles are used as a result of an economic downturn in Israel, an increase in
use of mass transportation, an increase in vehicle related taxes, an increase in the imputed value of vehicles provided as a part
of employee compensation or other macroeconomic changes affecting the use of vehicles. In addition, our SVR services significantly
depend on Israeli insurance companies mandating subscription to a service such as the Company’s. If Israeli insurance companies
cease to require such subscriptions, our business could be significantly adversely affected. We also rely on the renewal and retention
of several operating licenses issued by certain Israeli regulatory authorities. Should such authorities fail to renew any of these
licenses, suspend existing licenses, or require additional licenses, we may be forced to suspend or cease certain services we
provide.
Many
of our employees in Israel are required to perform military reserve duty.
All
non-exempt male adult permanent residents of Israel under the age of 40, including some of Pointer’s employees, are obligated
to perform military reserve duty and may be called to active duty under emergency circumstances. In the past there have been significant
call ups of military reservists, and it is possible that there will be additional call-ups in the future. While Pointer has operated
effectively despite these conditions in the past, we cannot assess the impact these conditions may have on it in the future, particularly
if emergency circumstances occur. Our operations could be disrupted by the absence for a significant period of one or more of
our key employees or a significant number of our other employees due to military service. Any disruption in our operations would
harm our business.
We
may be adversely affected by a change of the Israeli Consumer Price Index.
Our
exposure to market rate risk for changes in the Israeli Consumer Price Index (the “Israeli CPI”) relates primarily
to loans borrowed by us from banks and other lenders. While we do not currently have any loans linked to the Israeli CPI, we may
require additional financing by means of loans linked to the Israeli CPI, in which case we will be exposed to the risk that the
rate of Israeli CPI, which measures inflation in Israel, will exceed the rate of devaluation of the NIS in relation to the U.S.
Dollar or that the timing of this devaluation lags behind inflation in Israel. This would have the effect of increasing the Dollar
cost of our borrowings.
By
administrative order, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordination Bureau of Economic Organizations, relating primarily to the length of the workday, pension
contributions, insurance for work-related accidents, and other conditions of employment are applicable to our employees. In accordance
with these provisions, the salaries of the Company’s employees are partially indexed to the Israeli CPI. In the event that
inflation in Israel increases, we will have to increase the salaries of our employees in Israel.
The
Argentine government may enact or enforce measures to preempt or respond to social unrest or economic turmoil which may adversely
affect our business in Argentina.
Our
subsidiary Pointer Argentina operates in Argentina, where the government has historically exercised significant influence over
the country’s economy. In recent years, Argentina has faced nationwide strikes that disrupted economic activity and have
heightened political tension and there has been a significant devaluation of the Argentine peso relative to the U.S. Dollar. In
addition, future government policies to preempt, or in response to, social unrest may include expropriation, nationalization,
forced renegotiation or modification of existing contracts, suspension of the enforcement of creditors’ rights, new taxation
policies, customs duties and levies including royalty and tax increases and retroactive tax claims, and changes in laws and policies
affecting foreign trade and investment. Such policies could destabilize the country and adversely and materially affect the economy,
and thereby our business. Additionally, due to agreements with the General Workers’ Union in Argentina and the country’s
high inflation rate, we may be required to increase employee salaries at a rate which could adversely affect Pointer Argentina’s
business.
Economic
uncertainty and volatility in Brazil may adversely affect our business.
We
operate through our wholly owned subsidiary Pointer do Brasil Comercial Ltda. (“Pointer Brazil”) in Brazil, which
has periodically experienced extremely high rates of inflation. Inflation, along with governmental measures to fight inflation
and public speculation about possible future measures, has had significant negative effects on the Brazilian economy. In addition,
future governmental actions, including actions to adjust the value of the Brazilian real, may trigger increases in inflation.
There can be no assurance that inflation will not affect our business in Brazil in the future. In addition, any Brazilian government’s
actions to maintain economic stability, as well as public speculation about possible future actions, may contribute significantly
to economic uncertainty in Brazil. It is also difficult to assess the impact that turmoil in the credit markets will have on the
Brazilian economy and on our future operations and financial results or our operations in Brazil.
The
Brazilian currency has devalued frequently, including during the last two decades. Throughout this period, the Brazilian government
has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations and periodic
mini-devaluations, during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems,
exchange controls and dual exchange rate markets. There have been significant fluctuations in the exchange rates between Brazilian
currency and the U.S. Dollar and other currencies.
Devaluation
of the Brazilian real relative to the U.S. Dollar may create additional inflationary pressures in Brazil by generally increasing
the price of imported products and requiring recessionary governmental policies to curb aggregate demand. On the other hand, further
appreciation of the Brazilian real against the U.S. Dollar may lead to a deterioration of the current account and the balance
of payments, as well as dampen export-driven growth. The potential impact of the floating exchange rate and measures of the Brazilian
government aimed at stabilizing the Brazilian real is uncertain. In addition, a substantial increase in inflation may weaken investor
confidence in Brazil, impacting our ability to finance our operations in Brazil.
Pointer
Brazil is currently subject to various tax proceedings in Brazil. In August 2014, Pointer Brazil received a notice from the Brazilian
tax authority alleging that it had not paid an aggregate of $200,000 in value-added tax, the Brazilian ICMS tax, plus $1,446,000
of interest, in addition to a penalty fee in the aggregate of $1,646,000 collectively as of December 31, 2020. In July
2015, Pointer Brazil received another tax deficiency notice alleging that the services provided by Pointer Brazil should be classified
as “telecommunication services” and therefore Pointer Brazil should be subject to the state value-added tax. The aggregate
amount claimed to be owed under the notice was approximately $10,680,000 as of December 31, 2020. On August 14, 2018, the
lower chamber of the State Tax Administrative Court in São Paulo rendered a decision that was favorable to Pointer Brazil
in relation to the ICMS demands, but adverse with respect to the clerical obligation of keeping in good order a set of ICMS books
and related tax receipts. The state has the opportunity to appeal to the higher chamber of the State Tax Administrative Court.
While our legal counsel is of the opinion that it is probable that we will prevail in these proceedings and that no material costs
will arise in respect to these claims, litigation is inherently subject to many uncertainties and we cannot provide any assurance
that we will ultimately be successful.
The
Brazilian government has exercised, and may continue to exercise, significant influence over the Brazilian economy.
The
Brazilian economy has been characterized by significant involvement on the part of the Brazilian government, which often changes
monetary, credit and other policies to influence Brazil’s economy. The Brazilian government’s actions to control inflation
and affect other policies have often involved wage and price controls, the Central Bank’s base interest rates, as well as
other measures.
Actions
taken by the Brazilian government concerning the economy may have important effects on Brazilian corporations and other entities.
Our financial condition and results of operations in Brazil may be adversely affected by the following factors and the Brazilian
government’s response to the following factors:
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devaluations
and other exchange rate movements;
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inflation;
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investments;
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exchange
control policies;
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employment
levels;
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social
instability;
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price
instability;
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energy
shortages;
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interest
rates;
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liquidity
of domestic capital and lending markets;
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tax
policy; and
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other
political, diplomatic, social and economic developments in or affecting Brazil.
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Political
instability in Brazil may adversely affect Brazil’s economy and investment levels and have a material adverse effect on
the Company.
Brazil’s
political environment has historically influenced, and continues to influence, the performance of the country’s economy.
Political crises have affected and continue to affect the confidence of investors and the general public and have historically
resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.
The
recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to
a deteriorating political environment. Despite the ongoing recovery of the Brazilian economy, weak macroeconomic conditions in
Brazil are expected to continue in 2020. In addition, various ongoing investigations into allegations of money laundering and
corruption being conducted by the Brazilian Federal Prosecutor’s Office, including the largest such investigation known
as “Lava Jato,” have negatively impacted the Brazilian economy and political environment.
In
recent years, there has been significant political turmoil in connection with the impeachment of the former president (who was
removed from office in August 2016) and ongoing investigations of her successor (who left office in January 2019) as part of the
ongoing “Lava Jato” investigations. Presidential elections were held in Brazil in October 2018. We cannot predict
which policies the new President of Brazil, who assumed office on January 1, 2019, may adopt or change during his mandate or the
effect that any such policies might have on our business and on the Brazilian economy. Any such new policies or changes to current
policies may have a material adverse effect on the operations of our business in Brazil. Also, the political uncertainty resulting
from the presidential elections and the transition to a new government may have an adverse effect on our business, results of
operations and financial condition.
Economic
uncertainty and volatility in Mexico may adversely affect our business.
Our
subsidiaries Pointer Recuperacion Mexico S.A., de C.V. (“Pointer Recuperacion Mexico”) and Pointer Logistica y Monitoreo,
S.A. de C.V. (“Pointer Logistica”) operate in Mexico, which has gradually experienced, since 2013, substantial decrease
in the value of the Mexican peso against the U.S. dollar, together with growing inflation rates. Uncertainty about future U.S.
policies with respect to Mexico has caused further devaluation of the Mexiccan peso against the U.S. dollar since the U.S. elections
in November 2016. The devaluation of the Mexican peso and rise in inflation rate has triggered demonstrations and heightened political
tension. Severe devaluation may lead to future governmental actions, including actions to adjust the value of the Mexican peso,
policies which may trigger further increases in inflation. There can be no assurance that inflation will not affect our business
in Mexico in the future. In addition, any Mexican government’s actions to maintain economic stability, as well as public
speculation about possible future actions, may contribute significantly to economic uncertainty in Mexico. Economic instability
and or government imposition of exchange controls may also result in the disruption of the international foreign exchange markets
and may limit our ability to transfer or convert pesos into U.S. Dollars and other currencies. Such policies could destabilize
the country and adversely and materially affect the economy, and thereby our business. Additionally, due to agreements with the
Confederation of Workers of Mexico (CTM) in Mexico and the country’s high inflation rate, we may be required to increase
employee salaries at a rate which could adversely affect our business.
If
we do not achieve applicable black economic empowerment objectives in our South African businesses, we risk not being able to
renew certain of our existing contracts which service South African governmental and quasi-governmental customers, as well as
not being awarded future corporate and governmental contracts which would result in the loss of revenue.
The
South African government, through the Broad-Based Black Economic Empowerment Act, No. 53 of 2003, the Codes of Good Practice and
Sector Codes published pursuant thereto (collectively, the “BBBEE”) has established a legislative framework for the
promotion of broad-based black economic empowerment. BBBEE objectives are pursued in significant part by requiring parties who
contract with corporate, governmental or quasi-governmental entities in South Africa to achieve BBBEE compliance through a rating
system by satisfaction of various elements on an applicable scorecard. Among other things, parties improve their BBBEE score when
procuring goods and services from businesses that have earned good BBBEE ratings, which include black owned businesses.
In
October 2017, Pointer sold 12% of Pointer South Africa’s issued and outstanding share capital as of the date thereof, to
Ms. Preshnee Moodley, who also serves on Pointer South Africa’s board of directors. Following the sale, Pointer South Africa
holds ownership recognition under the applicable BBBEE legislation at level 5. Pointer and Ms. Moodley also entered into a written
shareholders’ agreement in respect of Pointer South Africa, which governs their relationship as shareholders of Pointer
South Africa.
Failing
to achieve applicable BBBEE objectives could jeopardize our ability to maintain existing business, or to secure future business,
from corporate, governmental or quasi-governmental customers in South Africa that could materially and adversely affect our business,
financial condition and results of operations.
Risks
Related to our Securities
Holders
of our Series A Preferred Stock can exercise significant control over the Company, which could limit the ability of our stockholders
to influence the outcome of key transactions, including a change of control.
In
connection with the closing of the Transactions, we issued Series A Convertible Preferred Stock, par value $0.01 per share (the
“Series A Preferred Stock”), to the Investors. The Series A Preferred Stock represents a significant percentage of
the aggregate voting power of the Company. Based on an initial conversion price of $7.319, the Investors, who are the initial
holders of the Series A Preferred Stock, own approximately 17% of the Company on an as-converted basis as of March 17,
2021. Except as required by applicable law or as otherwise specifically set forth in our Amended and Restated Certificate
of Incorporation (the “Charter”), the holders of Series A Preferred Stock will not be entitled to vote on any matter
presented to our stockholders unless and until any holder of Series A Preferred Stock provides written notification to the Company
that such holder is electing, on behalf of all holders of Series A Preferred Stock, to activate their voting rights and in doing
so rendering the Series A Preferred Stock voting capital stock of the Company (such notice, a “Series A Voting Activation
Notice”). From and after the delivery of Series A Voting Activation Notice, all holders of the Series A Preferred Stock
will be entitled to vote with the holders of our common stock as a single class on an as-converted basis unless and until such
time as the holders of at least a majority of the outstanding shares of Series A Preferred Stock provide further written notice
to the Company that they elect to deactivate their voting rights. In addition, the aggregate voting power of the Series A Preferred
Stock may increase further in connection with the accrual of dividends at an initial minimum rate of 7.5% per annum, which may
be payable, at our election, in kind through the issuance of additional shares of Series A Preferred Stock. However, to the extent
voting rights of the Series A Preferred Stock have been activated, any holder of Series A Preferred Stock shall not be entitled
to cast votes for the number of shares of our common stock issuable upon conversion of shares of Series A Preferred Stock held
by such holder that exceeds the quotient of (i) the aggregate Series A Issue Price (as defined below) for such shares of Series
A Preferred Stock divided by (ii) $5.57 (subject to adjustment for stock splits, stock dividends, combinations, reclassifications
and similar events, as applicable). As a result, the holders of shares of the Series A Preferred Stock have the ability to significantly
influence the outcome of any matter submitted for the vote of our stockholders.
In
addition, the Series A Preferred Stock will have representation on our board of directors and will have significant control over
the management and affairs of the Company. So long as shares of Series A Preferred Stock remain outstanding and represent 15%
or more, on an as-converted basis, of the voting power of our common stock (irrespective of whether or not a Series A Voting Activation
Notice has been delivered to the Company), the holders of at least a majority of the outstanding shares of Series A Preferred
Stock, voting as a separate class, will be entitled to elect two directors (the “Series A Directors”) to our board
of directors and any committee or subcommittee thereof (subject to the application of SEC and Nasdaq independence requirements).
So long as any shares of Series A Preferred Stock remain outstanding and represent less than 15% but not less than 5%, on an as-converted
basis, of the voting power of our common stock (irrespective of whether or not a Series A Voting Activation Notice has been delivered
to the Company), the holders of at least a majority of the outstanding shares of Series A Preferred Stock, voting as a separate
class, will be entitled to elect one Series A Director to our board of directors. For so long as any shares of Series A Preferred
Stock remain outstanding and there are no Series A Directors on our board of directors, the holders of at least a majority of
the outstanding shares of Series A Preferred Stock, voting as a separate class, will be entitled to designate one non-voting observer
to attend all meetings of our board of directors and committees and subcommittees thereof, although the observer may be excluded
from executive sessions of any committee at the discretion of such committee.
Further,
the Series A Preferred Stock will have consent rights over certain significant corporate transactions. So long as shares of Series
A Preferred Stock are outstanding and convertible into shares of our common stock that represent at least 10% of the voting power
of our common stock, or the Investors or their affiliates continue to hold at least 33% of the aggregate amount of Series A Preferred
Stock issued to the Investors on the date on which any shares of Series A Preferred Stock are first issued (the “Original
Issuance Date”), the consent of the holders of at least a majority of the outstanding shares of Series A Preferred Stock
will be necessary for us to, among other things, (i) liquidate the Company or any operating subsidiary or effect any Deemed Liquidation
Event (as defined in the Charter), except for a Deemed Liquidation Event in which the holders of Series A Preferred Stock receive
an amount in cash not less than the Redemption Price (as defined below), (ii) amend our organizational documents in a manner that
adversely affects the Series A Preferred Stock, (iii) issue any securities that are senior to, or equal in priority with, the
Series A Preferred Stock or issue additional shares of Series A Preferred Stock to any person other than the Investors or their
affiliates, (iv) incur indebtedness above the agreed-upon threshold, (v) change the size of our board of directors to a number
other than seven, or (vi) enter into certain affiliated arrangements or transactions.
The
Series A Preferred Stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of holders
of our common stock, which could adversely affect our liquidity and financial condition, and may result in the interests of the
holders of Series A Preferred Stock differing from those of the holders of our common stock.
The
Series A Preferred Stock ranks senior to the shares of our common stock, with respect to dividend rights and rights on the distribution
of assets on any voluntary or involuntary liquidation, dissolution or winding up of the Company or upon a Deemed Liquidation Event.
The Series A Preferred Stock has a liquidation preference equal to the greater of (i) $1,000 (subject to ratable adjustment in
the case of stock dividends (other than preferred dividends), stock splits, reverse stock splits, combinations, divisions and
reclassifications affecting the Series A Preferred Stock) (the “Series A Issue Price”) per share plus all accrued
and unpaid dividends thereon (except in the case of a Deemed Liquidation Event, then 150% of such amount) and (ii) the amount
such holder would have received if the Series A Preferred Stock had converted into our common stock immediately prior to such
event.
In
addition, holders of Series A Preferred Stock will be entitled to cumulative dividends at a minimum rate of 7.5% per annum, quarterly
in arrears, as set forth in the Charter. Commencing on the 66-month anniversary of the Original Issuance Date, and on each monthly
anniversary thereafter, the dividend rate will increase by 100 basis points, until the dividend rate reaches 17.5% per annum,
subject to our right to defer the increase for up to three consecutive months on the terms set forth in the Charter. The dividends
are payable at our election in kind, through the issuance of additional shares of Series A Preferred Stock, or in cash, provided
no dividend payment failure has occurred and is continuing and that there have not previously occurred two or more dividend payment
failures.
Further,
at any time after (i) the 66-month anniversary of the Original Issuance Date, (ii) following delivery of a mandatory conversion
notice by us, or (iii) upon a Deemed Liquidation Event, subject to Delaware law governing distributions to stockholders, the holders
of the Series A Preferred Stock may elect to require us to redeem all or any portion of the outstanding shares of Series A Preferred
Stock for an amount per share equal to the greater of (i) the product of (x) 1.5 multiplied by (y) the sum of the Series A Issue
Price, plus all accrued and unpaid dividends and (ii) the product of (x) the number of shares of our common stock issuable upon
conversion of such Series A Preferred Stock multiplied by (y) the volume weighted average price of our common stock during the
30 consecutive trading day period ending on the trading date immediately prior to the date of such redemption notice or, if calculated
in connection with a Deemed Liquidation Event, the value ascribed to a share of our common stock in such Deemed Liquidation Event
(the “Redemption Price”). If the holders of Series A Preferred Stock elect to redeem all outstanding shares of Series
A Preferred Stock and we have not redeemed all such shares on the applicable date on which the redemption should occur, and such
redemption has not been completed on the six month anniversary thereof, the holders of at least a majority of the outstanding
shares of Series A Preferred Stock will have the right to initiate, conduct and direct, subject to the approval of our board of
directors, a customary sale process regarding the sale of the Company and/or its subsidiaries.
Finally,
at any time after the third anniversary of the Original Issuance Date, provided that (i) we are not then in material breach of
(or has previously on no more than two occasions materially breached) any of provisions of the Charter, (ii) the terms of any
other indebtedness or agreement would not prohibit such redemption, and (iii) we have not previously exercised such redemption
right, we may elect to redeem all (but not less than all) shares of Series A Preferred Stock for an amount per share equal to
the Redemption Price.
These
dividend and redemption payment obligations could significantly impact our liquidity and reduce the amount of our cash flows that
are available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes.
Our obligations to the holders of Series A Preferred Stock could also limit our ability to obtain additional financing or increase
its borrowing costs, which could have an adverse effect on our financial condition. The preferential rights described above could
also result in divergent interests between the holders of shares of Series A Preferred Stock and the holders of our common stock.
Any
issuance of our common stock upon conversion of the Series A Preferred Stock will cause dilution to then existing Company stockholders
and may depress the market price of our common stock.
The
Series A Preferred Stock accrues dividends at an initial minimum rate of 7.5% per annum and following the 66-month anniversary
of the Original Issuance Date, such dividend rate could increase to as high as 17.5% per annum. Each share of Series A Preferred
Stock is convertible, at the option of the holders, into the number of shares of our common stock equal to the quotient (rounded
up to the nearest whole number) of (i) the Series A Issue Price, plus any accrued and unpaid dividends, divided by (ii) the Series
A Conversion Price, subject to adjustment and certain anti-dilution adjustments. The Series A Conversion Price is initially equal
to $7.319.
The
issuance of our common stock upon conversion of the Series A Preferred Stock will result in immediate and substantial dilution
to the interests of holders of our common stock, and such dilution will increase over time in connection with the accrual of dividends
on the Series A Preferred Stock.
The
concentration of common stock ownership among our executive officers and directors could limit the ability of other stockholders
of the Company to influence the outcome of corporate transactions or other matters submitted for stockholder approval.
As
of March 17, 2021, our executive officers and directors beneficially owned, in the aggregate, 8% of our outstanding
common stock, not including 2,150,114 shares of common stock that our executive officers and directors may acquire upon
the exercise of outstanding options or if they otherwise acquire additional shares of common stock in the future. As a result,
our officers and directors may have the ability to influence the outcome of all corporate actions requiring stockholder approval,
irrespective of how our other stockholders may vote, including the following actions:
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the
election of directors;
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adoption
of stock option or other equity incentive compensation plans;
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the
amendment of our organizational documents; and
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the
approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets.
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Future
sales of our common stock, including sales of our common stock acquired upon the exercise of outstanding options, may cause the
market price of our common stock to decline.
The
market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in
the market, or sales of our common stock acquired upon the exercise of outstanding options, or the perception that these sales
could occur. These sales also may make it more difficult for us to sell equity securities at a time and price that we deem appropriate.
We
have 35,976,809 shares of common stock outstanding as of March 17, 2021, of which 33,171,567 shares are freely
transferable without restriction, and 2,805,242 shares are held by our officers and directors and, as such, are subject
to the applicable volume, manner of sale, holding period and other limitations of Rule 144 under the Securities Act. In addition,
as of December 31, 2020, options to purchase 3,624,000 shares of our common stock were issued and outstanding, of which
1,247,000 were vested. The weighted-average exercise price of the vested stock options is $5.60. We also may issue additional
shares of stock in connection with our business, including in connection with acquisitions, and may grant additional stock options
to our employees, officers, directors and consultants under our stock option plans or warrants to third parties. If a significant
portion of these shares of common stock were sold in the public market, the market value of our common stock could be adversely
affected.
The
issuance of equity or debt securities under our shelf registration statement could have a negative impact on the price of our
common stock.
We
have on file a shelf registration statement on Form S-3 that was declared effective by the SEC on November 27, 2019. The shelf
registration statement allows us to raise up to an aggregate of $60.0 million from the sale of common stock, preferred stock,
warrants, debt securities, and units, or any combination of the foregoing. To date, we have sold, pursuant to the shelf registration
statement, an aggregate of 809,846 shares of common stock for approximately $4.2 million of gross proceeds in connection with
our ATM Offering and an aggregate of 4,427,500 shares of common stock for gross proceeds of approximately $28.8 million in connection
with our Underwritten Public Offering. If we issue all of the remaining available securities included in the shelf registration
statement, there could be a substantial dilutive effect on our common stock and an adverse effect on the price of our common stock.
Our
Charter provides that the Court of Chancery of the State of Delaware will be the exclusive forum for certain legal actions between
us and our stockholders, which could limit stockholders’ ability to obtain a judicial forum viewed by the stockholders as
more favorable for disputes with us or our directors, officers or employees, and the enforceability of the exclusive forum provision
may be subject to uncertainty.
Article
SIXTEENTH of the Charter provides, subject to certain exceptions enumerated in Article SIXTEENTH, that, unless we consent in writing
to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum
for any stockholder to bring (i) any derivative action brought on behalf of the Company, (ii) any action asserting a claim of
breach of fiduciary duty owed by any current or former director, officer or other employee or stockholder of the Company, (iii)
any action asserting a claim arising pursuant to the General Corporation Law of Delaware (the “DGCL”) or the Charter
or our Amended and Restated Bylaws or as to which the DGCL confers jurisdiction on such court, or (iv) any action asserting a
claim governed by the internal affairs doctrine, except for, in each of the aforementioned actions, among other things, any claims
which are vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery of the State of Delaware or
for which the Court of Chancery of the State of Delaware does not have subject matter jurisdiction. Accordingly, the exclusive
forum provision will not apply to claims arising under the Securities Act of 1933, as amended, the Securities Exchange Act of
1934, as amended, or other federal securities laws for which there is exclusive federal or concurrent federal and state jurisdiction.
Article SIXTEENTH provides that any person or entity who acquires an interest in our capital stock will be deemed to have notice
of and consented to the provisions of Article SIXTEENTH. Stockholders will not be deemed to have waived our compliance with the
federal securities laws and the rules and regulations thereunder. Although we believe this exclusive forum provision benefits
us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, this exclusive
forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes
with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such
claims. Further, in the event a court finds the exclusive forum provision contained in the Charter to be unenforceable or inapplicable
in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our
business, operating results and financial condition.
The
Charter contains a provision renouncing our interest and expectancy in certain corporate opportunities which may prevent us from
receiving the benefit of certain corporate opportunities.
The
“corporate opportunity” doctrine provides that corporate fiduciaries, as part of their duty of loyalty to the corporation
and its stockholders, may not take for themselves an opportunity that in fairness should belong to the corporation. As such, a
corporate fiduciary may generally not pursue a business opportunity which the corporation is financially able to undertake and
which, by its nature, falls into the line of the corporation’s business and is of practical advantage to it, or in which
the corporation has an actual or expectant interest, unless the opportunity is disclosed to the corporation and the corporation
determines that it is not going to pursue such opportunity. Section 122(17) of the DGCL, however, expressly permits a Delaware
corporation to renounce in its certificate of incorporation any interest or expectancy of the corporation in, or in being offered
an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities
that are presented to the corporation or its officers, directors or stockholders.
Article
TWELFTH of the Charter contains a provision that, to the maximum extent permitted under the law of the State of Delaware, the
Company renounces any interest or expectancy of the Company in, or in being offered an opportunity to participate in, business
opportunities that are from time to time presented to the Series A Directors, any holder of Series A Preferred Stock (or the Company’s
common stock issuable upon the conversion of Series A Preferred Stock) or any partner, manager, member, director, officer, stockholder,
employee or agent or affiliate of any such holder. Our board of directors believes that this provision, which is intended to provide
that certain business opportunities are not subject to the “corporate opportunity” doctrine, is appropriate, as the
Investors, who are the initial holders of the Series A Preferred Stock, and their affiliates invest in a wide array of companies,
including companies with businesses similar to the Company, and without such assurances, the Investors would be unwilling or unable
to enter into the Investment Agreement.
As
a result of this provision, we may be not be offered certain corporate opportunities which could be beneficial to us and our stockholders.
While we are unable at this time to predict how this provision may adversely impact our stockholders, it is possible that we would
not be offered the opportunity to participate in a future transaction which might have resulted in a financial benefit to us,
which could, in turn, result in a material adverse effect on our business, financial condition, results of operations, or prospects.
Provisions
of Delaware law or the Charter could delay or prevent an acquisition of the Company, even if the acquisition would be beneficial
to our stockholders, and could make it more difficult for stockholders to change our management.
The
Charter contains provisions that may discourage an unsolicited takeover proposal that stockholders may consider to be in their
best interests. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control.
Together, these provisions may make more difficult the removal of management and may discourage transactions that otherwise could
involve payment of a premium over prevailing market prices for our securities. These provisions include: the right of the holders
of the Series A Preferred Stock to appoint up to two directors; the absence of cumulative voting in the election of directors;
the ability of our board of directors to issue up to 50,000 shares of currently undesignated and unissued preferred stock without
prior stockholder approval; the consent rights of the holders of Series A Preferred Stock to certain corporate actions and transactions;
advance notice requirements for stockholder proposals or nominations of directors; limitations on the ability of stockholders
to call special meetings or act by written consent; preemptive rights of the holders of the Series A Preferred Stock to participate
in future securities offerings of the Company; the requirement that certain amendments to the Charter be approved by 75% of the
voting power of the outstanding shares of our capital stock; and the ability of our board of directors to amend our bylaws without
stockholder approval.