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 the 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 the Company’s 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 forward-looking statements in this form. The actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. 30 Table of Contents Historical results may not indicate future performance. The Company’s forward-looking statements reflect its 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 a robotics and coding system, 3D printing solution and portable science lab. The Company’s products are integrated into its software suite that provides tools for presentation creation and delivery, assessment, and collaboration. To date, we have generated substantially all of the Company revenue from the sale of 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 the plan include: ● Integrating products of the acquired companies and cross training sales representatives 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 Concepts”), 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 The Company’s growth strategy includes acquiring assets and technologies of companies that have products, technologies, industry specializations or geographic coverage that extend or complement 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. 31 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 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 future average selling prices and unit costs. Gross profit and gross profit margin may fluctuate over time based on the factors described above. 32 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 the Company’s 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 June 30, 2022 and 2021 Revenues. Total revenues for the three months ended June 30, 2022 were $59.6 million as compared to $46.8 million for the three months ended June 30, 2021, resulting in a 27.5% 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 the Company’s solutions in the U.S. and Europe. FrontRow revenue for the three months ended June 30, 2022 was $6.8 million. Cost of Revenues. Cost of revenues for the three months ended June 30, 2022 was $42.8 million compared to $33.9 million for the three months ended June, 30, 2021, resulting in a 26.2% 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 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 June 30, 2022, was $16.8 million, as compared to $12.8 million for the three months ended June 30, 2021. The gross profit margin for the three months was 28.2% which is an increase of approximately 80 basis points compared to the comparable three months in 2021. Gross profit margin, adjusted for the net effect of acquisition-related purchase accounting of $1.2 million and $805 thousand, was 30.2% as compared to the 29.2%, as adjusted, reported for the three months ended June 30, 2022 and June 30, 2021, respectively. As previously reported gross 33 Table of Contents margins continue to be adversely impacted by supply chain challenges with increased freight costs which are now expected to continue throughout 2022. General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2022 were $15.3 million and 25.7% of revenues, as compared to $10.8 million and 23.1% of revenues for the three months ended June 30, 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 $649 thousand and 1.1% of revenues for the three months ended June 30, 2022, as compared to $481 thousand and 1.0% of revenues for the three months ended June 30, 2021. Other Income (Expense). Other expense (net) for the three months ended June 30, 2022 was $814 thousand, as compared to $1.3 million for the three months ended June 30, 2021. Other expense decreased primarily due to $1.6 million decrease in the fair value of derivative liabilities, and $536 thousand less in losses recognized upon the settlement of certain debt obligations in exchange for issuance of common shares in 2021, partially offset by a $1.7 million increase in interest expense associated with increased borrowings due to the new credit facility. Income Tax Expense. Income tax expense for the three months ending June 30, 2022 was $41 thousand, as compared to $2.5 million in income tax expense for the three months ended June 30, 2021. This significant decrease in income tax expense year-over-year is primarily due to the Company’s recording the discrete impact of a change in UK tax rates that was enacted during second quarter 2021. The Company recorded $2.2 million of income tax expense in 2021 to adjust its deferred tax liability in the UK to this new rate. The remaining decrease in income tax expense is due to the lower earnings in 2022 as compared to 2021 in our foreign jurisdictions. ​ Net Income (Loss). Net income was $26 thousand in the three months ended June 30, 2022 and a $2.2 million loss for the three months ended June 30, 2021, respectively. For the six-month periods ended June 30, 2022 and 2021 Revenues. Total revenues for the six months ended June 30, 2022 were $110.2 million as compared to $80.2 million for the six months ended June 30, 2021, resulting in a 37.5% increase. The increase in revenues was primarily due to the acquisitions of Interactive Concepts in March 2021 and FrontRow in December 2021, as well as increased demand for our solutions in the U.S., Europe, Middle East, and Africa. Organic revenue growth for Boxlight for the first half of 2022 was 19.5%. FrontRow revenue for the first six months of 2022 was $13.3 million and Interactive was $407 thousand. Cost of Revenues. Cost of revenues for the six months ended June 30, 2022 were $80.8 million as compared to $58.8 million for the six months ended June 30, 2021, resulting in an 37.4% increase. The increase in cost of revenues was associated with the acquisitions and growth of the business as discussed above and was also due to additional increases in global freight/shipping which the company has experienced following the COVID-19 pandemic. In 2021 we reported the cost increase to be approximately four times higher compared to pre-pandemic levels, this is expected to continue throughout 2022. Gross Profit. Gross profit for the six months ended June 30, 2022 was $29.5 million as compared to $21.4 million for the six months ended June 30, 2021. The gross profit margin remained flat at 26.7% for the six months ended June 30, 2021 and for the six months ending June 30, 2022. General and Administrative Expenses. General and administrative (“G&A”) expense for the six months ended June 30, 2022 were $30.8 million and 27.9% of revenue as compared to $20.9 million and 26.1% of revenue for the six months ended June 30, 2021. The increase in G&A expenses resulted from additional personnel costs associated with the acquired FrontRow operations, new hires for planned growth and stock compensation issuances. Research and Development Expenses. Research and development expenses were $1.3 million and 1.1% of revenue for the six months ended June 30, 2022 as compared to $955 thousand and 1.2% of revenue for the six months ended June 30, 2021. 34 Table of Contents The increase in research and development expense was primarily driven by an increase in contract services related to software development. Other Income (Expense). Other expense, net for the six months ended June 30, 2022 was $2.3 million as compared to other expense, net, of $4.4 million for the six months ended June 30, 2021, a decrease of $2.1 million. The decrease was primarily due to a $2.4 million loss recognized upon the settlement of certain debt obligations in exchange for issuance of common shares in 2021 coupled with a gain of $0.9 million recognized upon the settlement of certain debt obligations in 2022 and by a $1.9 million change in the fair value of derivative liabilities, offset by a $3.0 million increase in interest expense associated with increased borrowings due to the new credit facility. Income Tax Expense. Income tax benefit for the six months ending June 30, 2022 was $45 thousand, as compared to $2.5 million in income tax expense for the six months ended June 30, 2021. This significant decrease in income tax expense year-over-year is primarily due to the Company’s recording the discrete impact of a change in UK tax rates that was enacted during second quarter 2021. The Company recorded $2.2 million of income tax expense in 2021 to adjust its deferred tax liability in the UK to this new rate. The remaining decrease in income tax expense is due to the lower earnings in 2022 as compared to 2021 in our foreign jurisdictions. The effective tax rate is 0.93% for the six months ended June 30, 2021. The primary reason for this low rate is that there is no material income tax expense on the U.S. operations due to existing net operating loss carryforwards that are offset by a valuation allowance. ​ Net Loss. Net loss was $4.8 million and $7.4 million for the six months ended June 30, 2022 and 2021 respectively. The decrease in the net loss was primarily due to a $1.7 change in the fair value of the Whitehawk derivative liability, a decrease in loss on settlement of liabilities, partially offset by an increase in interest expense due to the new credit facility. ​ 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 and gain on the forgiveness of our PPP loan. Management uses EBITDA and Adjusted EBITDA as financial measures to evaluate the profitability and efficiency of the Company’s 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 the Company’s non-GAAP financial measures in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. 35 Table of Contents The following table contains reconciliations of net losses to EBITDA and adjusted EBITDA for the periods presented. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Three Months Ended ​ ​ Six Months Ended ​ ​ Six Months Ended ​ ​ June 30, ​ June 30, ​ ​ June 30, ​ June 30, (in thousands) ​ 2022 ​ 2021 ​ ​ 2022 ​ 2021 Net income (loss) ​ $ 26 ​ $ (2,220) ​ $ (4,829) ​ $ (7,388) Depreciation and amortization ​ 2,266 ​ 1,815 ​ 4,587 ​ 3,567 Interest expense ​ 2,417 ​ 764 ​ 4,733 ​ 1,782 Income tax expense (benefit) ​ 41 ​ 2,522 ​ (45) ​ 2,543 EBITDA ​ $ 4,750 ​ $ 2,881 ​ $ 4,446 ​ $ 504 Stock compensation expense ​ 929 ​ 1,182 ​ 2,062 ​ 1,859 Change in fair value of derivative liabilities ​ (1,660) ​ (41) ​ (1,650) ​ 225 Purchase accounting impact of fair valuing inventory ​ 589 ​ 15 ​ 1,206 ​ 30 Purchase accounting impact of fair valuing deferred revenue ​ 589 ​ 790 ​ 1,238 ​ 1,597 Net loss on settlement of debt ​ (3) ​ 533 ​ (856) ​ 2,735 Adjusted EBITDA ​ $ 5,194 ​ $ 5,360 ​ $ 6,446 ​ $ 6,950 ​ 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 June 30, 2022, we had cash and cash equivalents of $11.6 million, a working capital balance of $53.8 million, and a current ratio of 1.99. This financial position represents a significant improvement from a year ago at June 30, 2021 when we had $7.4 million of cash and cash equivalents, a working capital balance of $26.7 million, and a current ratio of 1.52. In addition to the cash flows generated by our ongoing operating activities we financed our operations during first six months of 2022 with our new credit facility from Whitehawk. Given uncertainty surrounding global supply chains, global markets and general global economic uncertainty as a result of the ongoing conflict between Russia and the Ukraine and the continuing COVID-19 pandemic, 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. 36 Table of Contents Recent Financing; See Footnote 9 – Debt for a discussion of recent financing. ​ 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 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. 37 Table of Contents 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.