Powerfleet Inc
For the period ended Dec 31, 2023. Filed May 9, 2024.
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FY2023 · Filed May 9, 2024
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Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.
As of December 31, 2023, we carried out an evaluation, with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2023.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of December 31, 2023, of our internal control over financial reporting based on the framework in 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was not effective as of December 31, 2023 due to material weaknesses in our internal control over financial reporting described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has concluded that material weaknesses existed as of December 31, 2023 with respect to the following:
| ● | Controls were not designed or operating effectively to ensure that the standalone selling prices (SSP), used to determine the appropriate allocation of revenue in multiple element arrangements, was appropriate. Determining SSP involves management judgment and management did not review timely the analysis of SSP or the underlying data supporting the analysis. |
| ● | Controls were not designed or operating effectively to ensure that the costs capitalized for internal use software were appropriate. Specifically, these controls did not provide for adequate review or documentation of the amounts capitalized, the related phase of the project and when projects should begin amortization. Furthermore, controls were not designed or operating effectively to ensure that the costs for software to be sold, leased or marketed were appropriate. Specifically, these controls did not provide for adequate review or documentation of the amounts capitalized, when projects met technological feasibility and when projects should begin amortization. |
| ● | Controls were not designed or operating effectively to ensure that the completeness, measurement and valuation of acquired assets and liabilities assumed in connection with the Movingdots acquisition was appropriate. Specifically, these controls did not provide for adequate review or documentation of the amounts recorded and management did not timely review the subsequent adjustments to the provisional amounts recorded or the underlying data supporting the valuation of the acquired intangible. |
| ● | Controls were not designed or operating effectively to ensure that the annual measurement and valuation of the Company’s reporting unit, prepared in connection with its annual goodwill impairment analysis, was appropriate. Specifically, these controls did not provide for adequate and timely review or documentation of the projected financial information and valuation assumptions used in the annual analysis. |
| ● | Controls over the financial statement close process were not designed or operating effectively to ensure the appropriate level of management review, including the appropriate level of precision, adequate evidence of management’s review, and the completeness and accuracy of key reports. Furthermore, the primary ERP had ineffective information technology general controls in the area of user access and change management over key information technology (“IT”) systems that support the financial reporting processes. As a result, the related U.S. process-level IT dependent controls and application controls were also ineffective. |
| ● | Controls were not designed or operating effectively to ensure that the accounting treatment for the measurement and valuation of the convertible redeemable preferred stock were appropriately calculated. Specifically, these controls did not provide for adequate review of the amounts recorded and management did not review timely the subsequent accretion of the preferred shares to the redemption value. This material weakness also existed in prior periods. |
As disclosed in the Explanatory Note to this Form 10-K and Note 2 to our consolidated financial statements, we are restating the prior year financial statements for the years ending December 31, 2021 and 2022 and each of the interim periods during fiscal 2022 and 2023 for the accounting for the redemption premium associated with the Series A Preferred Stock. As part of the restatement process, we are also correcting other unrelated immaterial errors that were previously either unrecorded or recorded as out-of-period adjustments.
We are still considering the full extent of the procedures to implement in order to remediate the material weaknesses described above.
As part of the business combination with MiX Telematics, we expect to migrate our central corporate accounting function to MiX Telematics’ central corporate accounting function and team. Benefits from this migration will include:
| ● | Implementation of a new ERP system |
| ● | Access to a larger and highly qualified team |
| ● | Mature internal risk team who are responsible for ensuring systems, process and controls are clearly documented and widely understood and followed throughout the organization |
Additionally, our current remediation plan includes:
| ● | Utilizing external resources to support its efforts to rework certain control gaps across the various processes in Israel and the United States with identified deficiencies |
| ● | Implementing enhanced documentation associated with management review controls and validation of the completeness and accuracy of key reports in Israel and the United States |
| ● | Training of relevant personnel reinforcing existing policies and enhanced policies with regards to the appropriate steps and procedures required to be performed related to the execution and documentation of internal controls |
Our independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K, Ernst & Young LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting which appears in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
Changes in Internal Control over Financial Reporting
Except for the material weaknesses identified during the fourth quarter of the year ended December 31, 2023 related to measurement and valuation of acquired assets and liabilities assumed in connection with the Movingdots acquisition, the annual measurement and valuation of the Company’s reporting unit, controls over the financial statement close process, specifically that the primary ERP had ineffective IT general controls in the area of user access and change management over key IT systems that support the financial reporting processes, and the measurement and valuation of the convertible redeemable preferred stock, there were no other changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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