Boxlight Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere herein. The Management’s Discussion and Analysis (“MD&A”) contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the 28 Table of Contents forward-looking statements in this form. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. Overview We are a technology company that is seeking to become a world-wide leading innovator and integrator of interactive products and software for schools, education, business, and government interactive spaces. We currently design, produce and distribute interactive displays, collaboration software, supporting accessories and professional services. We also distribute science, technology, engineering, and math (or “STEM”) products, including our robotics and coding system, 3D printing solution and portable science lab. Our products are integrated into our software suite that provides tools for presentation creation and delivery, assessment, and collaboration. To date, we have generated substantially all of our revenue from the sale of our hardware (primarily consisting of interactive displays) and software to the educational market in the United States and Europe. We have also implemented a comprehensive plan to reach and maintain profitability both from our core business operations and as a result of making strategic business acquisitions. Highlights of our plan include: ● Integrating products of the acquired companies and cross training our sales reps to increase their offerings and productivity. ● Hiring new sales representatives with significant industry experience in their respective territories. ● Expanding our reseller partner network both in key territories and in new markets, thereby increasing our penetration and reach. Recent Acquisitions On December 31, 2021, the Company and its wholly owned subsidiary, Boxlight, Inc, consummated the acquisition of 100% of the membership interests of FrontRow Calypso LLC, a Delaware limited liability company (“FrontRow”). FrontRow was acquired in exchange for payment of $34.7 million to Phonic Ear Inc. and Calypso Systems LLC, the equity holders of FrontRow (the “Equityholders”). The acquisition occurred pursuant to the terms of a membership interest purchase agreement, dated October 29, 2021 (the “Purchase Agreement”), between the Company, Boxlight, FrontRow and the Equityholders. Based in Petaluma, California, FrontRow makes technology that improves communication in learning environments, including developing network-based solutions for intercom, paging, bells, mass notification, classroom sound, lesson sharing, AV control and management. FrontRow also has offices in Toronto, Copenhagen, Brisbane, Hamilton (UK) and Shenzhen On March 23, 2021, the Company acquired 100% of the outstanding shares of Interactive Concepts BV, a company incorporated and registered in Belgium and a distributor of interactive technologies (“Interactive”), for total consideration of approximately $3.3 million in cash, common stock, and deferred consideration. Interactive has been the Company’s key distributor in Belgium and Luxembourg. Acquisition Strategy and Challenges Our growth strategy includes acquiring assets and technologies of companies that have products, technologies, industry specializations or geographic coverage that extend or complement our existing business. The process to undertake a potential acquisition is time-consuming and costly. We expect to expend significant resources to undertake business, financial and legal due diligence on our potential acquisition targets, and there is no guarantee that we will complete any acquisition that we pursue. 29 Table of Contents We believe we can achieve significant cost-savings by merging the operations of the companies we acquire and after their acquisition leverage the opportunity to reduce costs through the following methods: ● Staff reductions – consolidating resources, such as accounting, marketing, and human resources. ● Economies of scale – improved purchasing power with a greater ability to negotiate prices with suppliers. ● Improved market reach and industry visibility – increase in customer base and entry into new markets. Components of our Results of Operations and Financial Condition Revenues are comprised of hardware products, software services, and professional development revenues less sales discounts. ● Product revenue. Product revenue is derived from the sale of our hardware (interactive projectors), flat panels, peripherals, and accessories, along with other third-party products, directly to our customers, as well as through our network of domestic and international distributors. ● Professional development revenue. We receive revenue from providing professional development services through third parties and our network of distributors. Cost of revenues Our cost of revenues is comprised of the following: ● costs to purchase components and finished goods directly; ● third-party logistics costs; ● inbound and outbound freight costs, and customs and duties charges; ● costs associated with the repair of products under warranty; ● write-downs of inventory carrying value to adjust for excess and obsolete inventory and periodic physical inventory counts; and ● cost of professionals to deliver professional development training related to the use of our products. We outsource some of our warehouse operations and order fulfillment and purchase products from related and third parties. Our product costs will vary directly with volume and the costs of underlying product components as well as the prices we are able to negotiate with our contract manufacturers. Shipping costs fluctuate with volume as well as with the method of shipping chosen in order to meet customer demand. As a global company with suppliers centered in Asia and customers located worldwide, we have used, and may in the future use, air shipping to deliver our products directly to our customers. Air shipping is more costly than sea or ground shipping or other delivery options. We primarily use air shipping to meet the demand of our products during peak seasons and new product launches. Gross profit and gross profit margin Our gross profit and gross profit margin have been, and may in the future be, influenced by several factors including: product, channel, and geographical revenue mix; changes in product costs related to the release of projector models; component, contract manufacturing and supplier pricing and foreign currency exchange. As we primarily procure our product components and manufacture our products in Asia, our suppliers incur many costs, including labor costs, in other currencies. To the extent that exchange rates move unfavorably for our suppliers, they may seek to pass these additional costs on to us, which could have a material impact on our future average selling prices and unit costs. Gross profit and gross profit margin may fluctuate over time based on the factors described above. 30 Table of Contents Operating expenses We classify our operating expenses into two categories: general and administrative and research and development. General and administrative. General and administrative expense consists of personnel related costs, which include salaries and stock-based compensation, as well as the costs of professional services, such as accounting and legal, facilities, information technology, depreciation and amortization and other administrative expenses. General and administrative expense may fluctuate as a percentage of revenue, notably in the second and third quarters of our fiscal year when we have historically experienced our highest levels of revenue. Research and development. Research and development expense consists primarily of personnel related costs, prototype and sample costs, design costs and global product certifications mostly for wireless certifications. Other income (expense), net Other income (expense), net primarily consists of interest expense associated with our debt financing arrangements, gains (losses) on the settlements of debt and trade payable obligations exchanged for common shares, and the effects of changes in the fair value of derivative liabilities. Income tax expense We are subject to income taxes in the jurisdictions in which we do business, including the United States, United Kingdom, Mexico, Sweden, Finland, Holland, and Germany. The United Kingdom, Mexico, Sweden, Finland, Holland, and Germany have a statutory tax rate different from that in the United States. Additionally, certain of our international earnings are also taxable in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income, the absorption of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities and changes in tax laws. We regularly assess the likelihood of adverse outcomes resulting from the examination of our tax returns by the U.S. Internal Revenue Service, or IRS, and other tax authorities to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense may become necessary. Any such adjustments could have a significant impact on our results of operations. Operating Results – Boxlight Corporation For the three-month periods ended March 31, 2022 and 2021 Revenues. Total revenues for the three months ended March 31, 2022 were $50.6 million as compared to $33.4 million for the three months ended March 31, 2021, resulting in a 51.5% increase in revenue. Revenues primarily consist of hardware revenue, software revenue, and professional development. The increase in revenues was primarily due to the acquisition of FrontRow in December 2021, as well as increased demand for our solutions in the U.S. and Europe. FrontRow revenue for the three months ended March 31, 2022 was $6.5 million. Cost of Revenues. Cost of revenues for the three months ended March 31, 2022 was $38.0 million compared to $24.9 million for the three months ended March, 31, 2021, resulting in a 52.6% increase. Cost of revenues consists primarily of product cost, freight expenses, customs expense, and inventory adjustments. The increase in cost of revenues was associated with the acquisitions and growth of the business and was also due to additional increases in global freight/shipping which the company has experienced (as have many others) as a result of supply chain issues arising as a result of the COVID-19 pandemic. During 2021, the cost increase was approximately four times normal costs as compared to pre-pandemic levels. We expect such cost increases to continue throughout 2022. Gross Profit. Gross profit for the three months ended March 31, 2022, was $12.6 million, as compared to $8.6 million for the three months ended March 31, 2021. The gross profit margin for the three months was 24.9% which is a reduction of 7 basis points compared to the comparable three months in 2021. Gross profit margin, adjusted for the net effect of acquisition-related purchase accounting, was 27.4% as compared to the 28.0%, as adjusted, reported for the three months ended March 31, 2021. As previously reported gross margins continue to be adversely impacted by supply chain challenges with increased freight costs 31 Table of Contents which are now expected to continue throughout 2022; however, we anticipate gross profit percentage improvements in Q2 and beyond with reduced manufacturing costs. General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2022 were $15.5 million and 30% of revenues, as compared to $10.1 million and 30% of revenues for the three months ended March 31, 2021. The increase was mainly a result of new hires for planned growth and stock compensation issuances. Research and Development Expenses. Research and development expenses were $612 thousand and 1.2% of revenues for the three months ended March 31, 2022, as compared to $474 thousand and 1.4% of revenues for the three months ended March 31, 2021. Research and development expense primarily consists of costs associated with development of our proprietary hardware and software technologies. Other Expense (net). Other expense (net) for the three months ended March 31, 2022 was $1.5 million, as compared to $3.1 million for the three months ended March 31, 2021. Other expense decreased primarily due to $2.7 million less in losses recognized upon the settlement of certain debt obligations in exchange for issuance of common shares, offset by a $1.3 million increase in interest expense associated with increased borrowings due to the new credit facility. Income Tax Expense (benefit). Income tax benefit for the three months ending March 31, 2021 was $86 thousand, as compared to $21 thousand in income tax expenses for the three months ended March 31, 2021. Net Loss. Net loss was $4.9 million in the three months ended March 31, 2022 and $5.2 million for the three months ended March 31, 2021, respectively. To provide investors with additional insight and allow for a more comprehensive understanding of the information used by management in its financial and decision-making surrounding operations, we supplement our condensed consolidated financial statements which are prepared in accordance with GAAP with EBITDA and Adjusted EBITDA, both non-GAAP financial measures of earnings. EBITDA represents net income (loss) before income tax expense, interest income, interest expense, depreciation and amortization. Adjusted EBITDA represents EBITDA, plus stock compensation expense, the change in fair value of derivative liabilities, purchase accounting impact of fair valuing inventory and deferred revenue, and non-cash losses associated with debt settlement. Our management uses EBITDA and Adjusted EBITDA as financial measures to evaluate the profitability and efficiency of our business model, and to assess the strength of the underlying operations of our business. These adjustments, and the non-GAAP financial measure that is derived from them, provide supplemental information to analyze our operations between periods and over time. Investors should consider our non-GAAP financial measures in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. 32 Table of Contents The following table contains reconciliations of net losses to EBITDA and adjusted EBITDA for the periods presented. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, March 31, ​ (in thousands) 2022 2021 ​ Net loss ​ $ (4,856) ​ $ (5,169) ​ Depreciation and amortization ​ 2,321 ​ 1,754 ​ Interest expense ​ 2,317 ​ 1,018 ​ Income tax expense ​ (86) ​ 21 ​ EBITDA ​ $ (304) ​ $ (2,376) ​ Stock compensation expense ​ 1,086 ​ 677 ​ Change in fair value of derivative liabilities ​ 9 ​ 265 ​ Acquisition costs ​ — ​ — ​ Restructuring costs ​ — ​ — ​ Purchase accounting impact of fair valuing inventory ​ 617 ​ 15 ​ Purchase accounting impact of fair valuing deferred revenue ​ 649 ​ 807 ​ Net loss on settlement of Lind debt in stock ​ — ​ 2,203 ​ Net gain on forgiveness of PPP loan ​ ​ (835) ​ ​ — ​ Adjusted EBITDA ​ $ 1,222 ​ $ 1,591 ​ ​ Discussion of Effect of Seasonality on Financial Condition Certain accounts on our financial statements are subject to seasonal fluctuations. As our business and revenues grow, we expect these seasonal trends to be reduced. The bulk of our products are shipped to our educational customers prior to the beginning of the school year, usually in July, August, or September. To prepare for the upcoming school year, we generally build up inventories during the second quarter of the year. Therefore, inventories tend to be at the highest levels at that point in time. In the first quarter of the year, inventories tend to decline significantly as products are delivered to customers and we do not need the same inventory levels during the first quarter. Accounts receivable balances tend to be at the highest levels in the third quarter, in which we record the highest level of sales. Liquidity and Capital Resources As of March 31, 2022, we had cash and cash equivalents of $11.3 million, a working capital balance of $49.6 million, and a current ratio of 2.02. This financial position represents a significant improvement from a year ago at March 31, 2021 when we had $10.0 million of cash and cash equivalents, a working capital balance of $21.8 million, and a current ratio of 1.56. In addition to the cash flows generated by our ongoing operating activities we financed our operations during first quarter 2022 with our new credit facility from Whitehawk. In the current lingering COVID-19 pandemic environment, the availability of debt and equity capital has been reduced and the cost of capital has increased. Increasing our capital through equity issuance at this time could cause significant dilution to our existing stockholders. However, we are confident that the Company will be able to manage through the current challenges in the equity and debt finance markets by managing payment terms with customers and vendors. Our cash requirements consist primarily of day-to-day operating expenses, capital expenditures and contractual obligations with respect to facility leases. We lease all our office facilities. We expect to make future payments on existing leases from cash generated from operations. We have limited credit available from our major vendors and are required to prepay for the majority of our inventory purchases, which further constrains our cash liquidity. 33 Table of Contents Recent Financing To finance the acquisition of FrontRow, the Company and substantially all its direct and indirect subsidiaries, including Boxlight, Sahara and FrontRow as guarantors, entered into a maximum $68.5 million term loan credit facility, dated December 31, 2021 and as amended April 4, 2022 (the “Amended Credit Agreement”), with Whitehawk Finance LLC, as lender (the “Lender”), and White Hawk Capital Partners, LP, as collateral agent. Under the terms of the Credit Agreement, the Company received an initial term loan of $58.5 million on December 31, 2021 (the “Initial Loan”) and was provided with a subsequent delayed draw facility of up to $10 million that may be provided for additional working capital purposes under certain conditions (the “Delayed Draw”). The Initial Loan and Delayed Draw are collectively referred to as the “Term Loans.” The proceeds of the Initial Loan were used to finance the Company’s acquisition of FrontRow, pay off all indebtedness owed to our existing lenders, Sallyport Commercial Finance, LLC and Lind Global Asset Management, LLC, pay related fees and transaction costs, and provide working capital. Of the Initial Loan, $8.5 million was subject to repayment on February 28, 2022, with quarterly principal payments of $625,000 and interest payments commencing March 31, 2022 and the $50.0 million remaining balance plus any Delayed Draw loans becoming due and payable in full on December 31, 2025. The Term Loans will bear interest at the LIBOR rate plus 10.75%; provided that after June 30, 2022, if the Company’s Senior Leverage Ratio (as defined in the Credit Agreement) is less than 2.25, the interest rate would be reduced to LIBOR plus 10.25%. Such terms are subject to the Company maintaining a borrowing base in terms compliant with the Credit Agreement. On March 29, 2022, the Company received a Notice of Events of Default and Reservation of Rights (the “Notice”) from the Collateral Agent, alleging, among other things, defaults as a result of (i) failure to repay $8.5 million of the facility by February 28, 2022, (ii) non-compliance with the borrowing base resulting in the Company being in an over advance position under the Credit Agreement, and (iii) failure to timely provide certain reports and documents. As a result of the Notice, all accrued and unpaid interest owed under the Term Loan, became subject to a post-default interest rate equal to the highest interest rate allowed for under the Credit Agreement plus 2.50% until such time as the Events of Default are either waived or cured. Following the Company’s receipt of the Notice and pursuant to amendment to the Credit Agreement, dated April 4, 2022, the Collateral Agent and Lender agreed to extend the terms of repayment of the $8.5 million originally due on February 28, 2022 until February 28, 2023 and waive and/or otherwise extend compliance with certain other terms of the Credit Agreement in order to allow the Loan Parties adequate time to comply with such terms. The principal elements of the amendment included (a) an extension of time for the Loan Parties to repay $8.5 million of the principal amount of the term loan from February 28, 2022 to February 28, 2023, and (b) forbearance on $3,500,000 of over advances to grant the Loan Parties until May 16, 2022 to allow the Company to come into compliance with the borrowing base requirements set forth in the Credit Agreement. In such connection, the Loan Parties have since obtained credit insurance on certain key customers whose principal offices are located in the European Union and Australia as, without the credit insurance, their accounts owed to the Loan Parties had been deemed ineligible for inclusion in the borrowing base calculation primarily due to the perceived inability of the Collateral Agent to enforce security interests on such accounts. In addition, the Lender and Collateral Agent agreed to (i) reduce, through June 30, 2022, the minimum cash reserve requirement for the Loan Parties, (ii) reduce the interest rate by 50 basis points (to Libor plus + 9.75%) after delivery of the Loan Parties’ June 30, 2023 financial statements, subject to the Loan Parties maintaining 1.75 EBITDA coverage ratio, and (iii) waive all prior Events of Default under the Credit Agreement. In conjunction with the amendment to the Credit Agreement, the parties entered into an amended and restated fee letter (the “Fee Letter”) pursuant to which the parties agreed to prepayment premiums of (i) 5% for payments made on or before December 31, 2022, (ii) 4% for payments made between January 1, 2023 and December 31, 2023, and (iii) 2% for payments made between January 1, 2024 and December 31, 2025. Furthermore, the parties agreed that no prepayment premiums would be payable with respect to the first $5.0 million paid under the Term Loan, any payments made in relation to the $8.5 million due on or before February 28, 2023, any required amortization payments under the Credit Agreement and any mandatory prepayments by way of ECF or casualty events. Off Balance Sheet Arrangements We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations or liquidity and capital resources. Critical Accounting Policies and Estimates Our consolidated condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and 34 Table of Contents estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated condensed financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in the notes to the unaudited consolidated condensed financial statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain : 1. Revenue recognition 2. Business acquisitions 3. Goodwill and Intangible assets 4. Stock-based compensation expense Status as Emerging Growth Company We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we were able to take advantage of certain specified reduced reporting and other regulatory requirements that are available to public companies that are emerging growth companies. These provisions include: (1) an exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002; (2) an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies; (3) an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about our audit and our financial statements; and (4) reduced disclosure about our executive compensation arrangements. We elected to take advantage of the exemption from the adoption of new or revised financial accounting standards until they would apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. Under Section 2(a)(19) of the Securities Act of 1933 and Section 3(a)(80) of the Securities Exchange Act of 1934, as amended, an emerging growth company will lose its status upon the earliest of several conditions, one of which is reaching the last day of the fiscal year in which the fifth anniversary of the company’s first sale of equity securities pursuant to an effective registration statement occurs. For the Company, this will occur on January 1, 2023. Item 3. Quantitative and Qualitative Disclosure About Market Risk As a “smaller reporting company,” this item is not required. 35 Table of Contents