Powerfleet, Inc. 10-Q

Item 4. Controls and Procedures a. Disclosure controls and procedures. We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Due to the inherent limitations of controls systems, irrespective of how well controls are designed and operated, not all misstatements may be detected. These inherent limitations include, but are not limited to faulty judgments in decision-making, breakdown in controls can occur because of a simple error or mistake and/or controls can be circumvented by the individual act of persons, by the collusion of two or more people, or by management override of control. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such terms is defined in Rules 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness, as of September 30, 2024, of our internal control over financial reporting. Based on that evaluation, we concluded that, internal control over financial reporting were not effective as of September 30, 2024, due to material weaknesses in our internal control over financial reporting as disclosed in the 2023 Annual Report and the Form 10-KT. 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 our annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified material weaknesses in the design and operation of controls related to the determination of standalone selling prices, cost capitalized for internal use software, the accounting for business acquisitions, valuation of goodwill, measurement and valuation of the convertible redeemable preferred stock and the financial statement close process, which includes the information technology general controls in the areas of user access and change management over key information technology systems that support our financial reporting processes, the related process-level information technology dependent manual controls and application controls. As disclosed in Note 3, “Acquisition,” in Part I, Item 1, “Financial Statements (Unaudited),” we completed the MiX Combination on April 2, 2024. We excluded MiX Telematics’ disclosure controls and procedures that are subsumed by their internal control over financial reporting from the scope of management’s assessment of the effectiveness of our disclosure controls and procedures. This exclusion is in accordance with the guidance issued by the SEC that an assessment of a recently acquired business’s internal control over financial reporting may be om itted from management ’ s assessment of internal control over financial reporting for one year following the acquisition. As a result of our integration of MiX Telematics’ disclosure controls and procedures, certain controls will be evaluated and may be changed. MiX Telematics’ total revenues constituted approximately 57% of our consolidated revenues for the six months ended September 30, 2024. MiX Telematics’ total assets constituted approximately 35% of our consolidated total assets as of September 30, 2024. As disclosed in Note 24, “ Subsequent Events ,” in Part I, Item 1, “Financial Statements (Unaudited),” we completed the FC Acquisition on October 1, 2024. Fleet Complete ’ s disclosure controls and procedures will be excluded from the scope of management ’ s assessment of the effectiveness of our disclosure controls and procedures. This exclusion is in accordance with the guidance issued by the SEC that an assessment of a recently acquired business ’ s internal control over financial reporting may be om itted from management’s assessment of internal control over financial reporting for one year following the acquisition. Remediation As described in “Item 9A. Controls and Procedures” in Part II of the 2023 Annual Report and the Form 10-KT, we started the implementation of the remediation plan to address the material weaknesses mentioned above, including the material weakness reported for MiX Telematics. The remediation plan includes: • Investigating and understanding the root causes of the control deficiencies that resulted in the material weaknesses, and will continue to refine the remediation plan in conjunction with the integration of operations, procedures, control processes and information systems. 53 • Utilizing external resources to support 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 across the group. • Training of relevant personnel reinforcing existing and/or enhanced policies with regards to the appropriate steps and procedures required to be performed related to the execution and documentation of internal controls. In addition, as part the business combination with MiX Telematics, we are in the process of migrating and integrating the central corporate accounting functions and teams. This integration includes: • Adopting and implementing a standardized ERP system to be used across the company; • Evaluating and integrating accounting principles to align and adopt consistent accounting policies and practices; • Leveraging a larger highly qualified central corporate accounting team; • Utilizing a more mature internal risk team to coordinate management's efforts to design and implement systems, processes and controls that are documented and widely understood and followed throughout the organization. Management will continue with the implementation of the remediation plan and will reassess and test the design and operating effectiveness of controls. The material weaknesses will not be considered remediated until applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively. b. Changes in internal control over financial reporting. Except for the controls related to the material weaknesses reported in the 2023 Annual Report and the Form 10-KT related to the measurement and valuation of the acquired assets and liabilities assumed in connection with the business acquisitions, the annual measurement and valuation of our 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 September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. During the quarter ended June 30, 2024, we completed the MiX Combination. As part of our ongoing post-transaction activities, we continue the process of planning and rolling out the implementation of the ERP and subscription billing system to certain Powerfleet operations. Furthermore, as part of our integration activities, we expect additional changes to the internal control over financial reporting as we continue with our integration activities, which include the evaluation, rationalization and standardization of internal control over financial reporting. While we believe the controls in the post-transaction environment, supported by a uniform ERP system, will enhance the internal control environment, there are inherent risks associated to the integration and implementation of a new ERP system. We will continue to evaluate the processes and controls related to the integration and system implementation, as well as the assessment of the design adequacy and operating effectiveness of internal control over financial reporting throughout fiscal year 2025. Other than as described above under “ Remediation ”, the integration efforts and the implementation of the ERP system, there were no changes to the Company's internal control over financial reporting, as defined in Rule 13a-15(f) and 15d- 15(f) promulgated under the Exchange Act, during the three months ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. 54 PART II - OTHER INFORMATION Item 1. Legal Proceedings In the ordinary course of its business, we are at times subject to various legal proceedings. For a description of our material pending legal proceedings, see Note 22 to our consolidated financial statements contained in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. 55