What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-08 · 43 added, 109 removed, 156 unchanged (49% of the section changed)

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The Company’s products are integrated into its software suite that provides tools for presentation creation and delivery, assessment, and collaboration.

Effective January 1, 2023, we changed our segment reporting to align with the geographic markets in which we operate.

Our operations are now organized, managed, and classified into three reportable segments – Europe, Middle East, and Africa (“EMEA”), North and Central America (“Americas”), and all other geographic regions (“Rest of World”).

Our operations are organized, managed, and classified into three reportable segments – Europe, Middle East, and Africa (“EMEA”), North and Central America (“Americas”), and all other geographic regions (“Rest of World”).

Our EMEA segment consists of the operations of Sahara Holding Limited and its subsidiaries.

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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.

We primarily use air shipping to meet the demand for our products during peak seasons and new product launches.

Gross profit and gross profit margin

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Other (expense) income, net

Other (expense) income, net primarily consists of interest expense associated with our debt financing arrangements, gains (losses) on the settlements of debt, and the effects of changes in the fair value of derivative liabilities.

Other (expense) income, net primarily consists of interest expense associated with our debt financing arrangements, 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 of the United States.

We are subject to income taxes in the jurisdictions in which we do business, including the United States, Canada United Kingdom, Mexico, Sweden, Finland, Holland, Australia, Denmark and Germany.

The United Kingdom, Mexico, Sweden, Finland, Holland, Germany, Australia, Canada, and Denmark have a statutory tax rate different from that of the United States.

Additionally, certain jurisdictions of the Company’s international earnings are also taxable in the United States.

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Operating Results – Boxlight Corporation

For the three-month periods ended September 30, 2023 and 2022

Total revenues for the three months ended September 30, 2023 were $49.7 million as compared to $68.7 million for the three months ended September 30, 2022, resulting in a 27.7% decrease.

The decrease in revenues was primarily due to lower sales volume across all markets.

Cost of Revenues.

Cost of revenues for the three months ended September 30, 2023 were $31.7 million as compared to $47.7 million for the three months ended September 30, 2022, resulting in a 33.7% decrease.

The decrease in cost of revenues was attributable to the decrease in units sold, along with lower manufacturing and shipping costs in the third quarter of 2023 compared to the prior year’s third quarter.

Gross Profit.

Gross profit for the three months ended September 30, 2023 was $18.0 million as compared to $21.0 million for the three months ended September 30, 2022, a decrease of 14.3%.

The gross profit margin was 36.3% for the three months September 30, 2023 and 30.6% for the three months ending September 30, 2022.

The increase in gross profit margin is primarily related to the decrease in manufacturing and shipping costs noted above.

General and Administrative Expenses.

General and administrative expenses for the three months ended September 30, 2023 were $15.4 million, representing 31.0% of revenue as compared to $14.0 million or 20.3% of revenue for the three months ended September 30, 2022.

The increase can be attributed primarily to an increase in payroll related expenses to support the growth of the business in certain markets.

Research and Development Expenses.

Research and development expenses were $979 thousand and $604 thousand for the three months ended September 30, 2023 and 2022 , respectively, and representing 2.0% of revenue for the three months ended September 30, 2023, and 0.9% of revenue for the three months ended September 30, 2022.

Impairment of Goodwill.

The Company recorded goodwill impairment charges of $13.2 million for the three months ended September 30, 2023.

There were no goodwill impairment charges recorded in 2022.

Other Expense.

Other expense, net for the three months ended September 30, 2023 was $3.1 million as compared to $2.8 million for the three months ended September 30, 2022 , representing an increase of $0.2 million .

The increase in other expenses was primarily due to a $0.4 million increase in interest expense, partially offset by a $0.2 million change in the fair value of derivative liabilities.

Income Tax Expense.

Income tax expense for the three months ended September 30, 2023 was $3.1 million , as compared to $520 thousand for the three months ended September 30, 2022.

The increase in tax expense year-over-year is largely due to foreign pretax book income for the three months ended September 30, 2023 as compared to foreign pretax loss for the three months ended September 30, 2022 .

Net (Loss) Income.

Net loss was $17.8 million for the three months ended September 30, 2023.

Net income was $3.1 million for the three months ended September 30, 2022 and was a result of the changes noted above.

For the nine-month periods ended September 30, 2023 and 2022

Total revenues for the nine months ended September 30, 2023 were $137.9 million as compared to $179.0 million for the nine months ended September 30, 2022, resulting in a 22.9% decrease.

The decrease in revenues was primarily due to lower sales volume across all markets.

For the three-month periods ended March 31, 2024 and 2023

Total revenues for the three months ended March 31, 2024 were $37.1 million as compared to $41.2 million for the three months ended March 31, 2023, resulting in a 9.9% decrease.

The decrease in revenues was due to lower sales volum e primarily in the U.S.

Cost of Revenues.

Cost of revenues for the nine months ended September 30, 2023 were $86.9 million as compared to $128.5 million for the nine months ended September 30, 2022, resulting in a 32% decrease.

The decrease in cost of revenues was attributable to the decrease in units sold, along with lower manufacturing and shipping costs in the first three quarters of 2023 compared to the first three quarters of the prior year.

Cost of revenues for the three months ended March 31, 2024 were $24.3 million as compared to $26.0 million for the three months ended March 31, 2023, resulting in a 6.8% decrease.

The decrease in cost of revenues was attributable to the decrease in units sold.

Gross Profit.

Gross profit for the nine months ended September 30, 2023 was $51.0 million as compared to $50.5 million for the nine months ended September 30, 2022, an increase of 1.0%.

Gross profit margin was 37.0% for

the nine months ended September 30, 2023 and 28.2% for the nine months ended September 30, 2022.

The increase in gross profit is primarily related to the decrease in manufacturing and shipping costs noted above.

Gross profit for the three months ended March 31, 2024 was $12.8 million as compared to $15.1 million for the three months ended March 31, 2023, a decrease of 15.4%.

Gross profit margin was 34.5% for the three months ended March 31, 2024 and 36.8% for the three months ended March 31, 2023.

The decrease in gross profit margin is primarily related to a difference in product mix compared to the prior year quarter.

General and Administrative Expenses.

General and administrative expenses for the nine months ended September 30, 2023 were $45.4 million, representing 32.9% of revenue as compared to $44.7 million representing 25.0% of revenue for the nine months ended September 30, 2022.

The increase in general and administrative expenses for the period ended September 30, 2023 can be attributed primarily to an increase in payroll related expenses to support the growth of the business in certain markets.

General and administrative expenses for the three months ended March 31, 2024 were $15.2 million, representing 41.1% of revenue as compared to $14.7 million representing 35.8% of revenue for the three months ended March 31, 2023.

The increase in general and administrative expenses for the period ended March 31, 2024 can be attributed primarily to severance charges of approximately $0.9 million related to recent headcount reductions.

Research and Development Expenses.

Research and development expenses for the nine months ended September 30, 2023 and 2022 were $2.1 million and $1.9 million and represented 1.5% and 1.0% of revenue, respectively.

Impairment of Goodwill.

The Company recorded goodwill impairment charges of $13.2 million for the nine months ended September 30, 2023.

There were no goodwill impairment charges recorded in 2022.

Research and development expenses for the three months ended March 31, 2024 and 2023 were $1.2 million and $0.6 million, respectively and represented 3.2% and 1.4% of revenue, respectively.

The increase can be attributable to new research and development projects that began during the prior year.

Other Expense.

Other expense, net for the nine months ended September 30, 2023 was $8.4 million as compared to $5.1 million for the nine months ended September 30, 2022 , representing an increase of $3.3 million .

The increase was due to a $1.5 million decrease in the fair value of derivative liabilities, a $0.9 million increase in interest expense, and $0.9 million recognized upon the settlement of certain debt obligations during the nine months ended September 30, 2022.

Other expense, net for the three months ended March 31, 2024 was $2.6 million as compared to $2.7 million for the three months ended March 31, 2023 , representing a decrease of $0.1 million .

The decrease was due to a $0.4 million change in the fair value of derivative liabilities, offset by a $0.2 million increase in interest expense, and a $0.1 million increase in foreign currency transaction losses during the three months ended March 31, 2023.

Income Tax Expense.

Income tax expense for the nine months ended September 30, 2023 was $3.4 million, as compared to a $475 thousand in income tax expense for the nine months ended September 30, 2022 .

The increase in tax expense year-over-year is largely due to the increase in the estimated annual effective tax rate of the US legacy Boxlight entities.

Net loss was $21.5 million and $1.7 million for the nine months ended September 30, 2023 and 2022 respectively and was a result of the changes noted above.

Income tax expense for the three months ended March 31, 2024 was $0.9 million, as compared to a $51 thousand for the three months ended March 31, 2023.

The increase in tax expense is primarily due to higher U.S.

taxes related to interest expense and increased net operating loss limitations.

Net loss was $7.1 million and $2.9 million for the three months ended March 31, 2024 and 2023, respectively, and was a result of the changes noted above.

Use of Non-GAAP financial measures

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EBITDA represents net loss before income tax expense, interest income, interest expense, depreciation and amortization.

Adjusted EBITDA represents EBITDA, plus stock compensation expense, impairment of goodwill, 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.

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 severance charges.

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.

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(in thousands) Three Months Ended

September 30, 2023 Three Months Ended

September 30, 2022 Nine Months Ended

September 30, 2023 Nine Months Ended

September 30, 2022

Net (Loss) Income $ (17,750) $ 3,105 $ (21,485) $ (1,725)

March 31, 2024 Three Months Ended

March 31, 2023

Net Loss $ (7,089) $ (2,924)

Depreciation and amortization 2,069 2,263

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Purchase accounting impact of fair valuing deferred revenue 309 470

Gain on settlement of debt — — — (856)

Impairment of goodwill 13,226 — 13,226 —

Severance charges 943 —

Adjusted EBITDA $ 179 $ 3,315

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Liquidity and Capital Resources

As of September 30, 2023, we had cash and cash equivalents of $18.4 million, a working capital balance of $61.4 million, and a current ratio of 2.24.

On September 30, 2022, we had $22.0 million of cash and cash equivalents, a working capital balance of $62.3 million, and a current ratio of 1.9.

For the nine months ended September 30, 2023 and 2022, we had net cash provided by operating activities of $8.2 and $0.5 million, respectively.

Cash provided by operating activities increased year over year as a result of higher margins on our products leading to increased operating income.

We had net cash used in investing activities of $226 thousand and $1.1 million for the nine months ended September 30, 2023 and 2022, respectively.

As of March 31, 2024, we had cash and cash equivalents of $11.8 million, a working capital balance of $46.6 million, and a current ratio of 2.17.

On March 31, 2023, we had $11.3 million of cash and cash equivalents, a working capital balance of $61.6 million, and a current ratio of 2.75.

For the three months ended March 31, 2024 and 2023, we had net cash used in operating activities of $1.9 million.

We had net cash used in investing activities of $394 thousand and $81 thousand for the three months ended March 31, 2024 and 2023, respectively.

Cash used in investing activities is related to purchases of property and equipment.

For the nine months ended September 30, 2023 and 2022, we had net cash used in financing activities of $3.0 million and net cash provided by investing activities of $4.4 million, respectively.

Cash provided by financing activities is primarily related to principal payments on debt of $5.0 million and $1.0 million in payments of fixed dividends to our Series B preferred shareholders, slightly offset by a $3.0 million draw under the Company’s Credit Facility and stock option exercise proceeds of $13 thousand.

For the three months ended March 31, 2024 and 2023, we had net cash used in financing activities of $2.6 million and $1.0 million, respectively.

Cash used in financing activities is related to principal payments on debt of $2.3 million and $0.3 million in payments of fixed dividends to our Series B preferred shareholders.

Our liquidity needs are funded by operating cash flow and available cash.

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We have limited credit available from our major vendors and are required to prepay a percentage of our inventory purchases, which further constrains our cash liquidity.

In addition, our industry is seasonal with many sales to educational customers occurring during the second and third quarters when schools make budget appropriations and classes are not in session

limiting disruptions related to product installation.

In addition, our industry is seasonal with many sales to educational customers occurring during the second and third quarters when schools make budget appropriations and classes are not in session limiting disruptions related to product installation.

This seasonality makes our needs for cash vary significantly from quarter to quarter.

In addition to the cash flows generated by our ongoing operating activities we financed our operations during 2024 and 2023 with our Credit Facility with Whitehawk.

Prior to April 24, 2023, we maintained a delayed draw term loan of which we had $7.5 million available.

On April 24, 2023, we drew $3.0 million on our delayed draw term loan that was used for working capital purposes.

The completion of the additional draw eliminates further delayed draws under the term loan agreement.

The $3.0 million was repaid during the third quarter of 2023.

On April 19, 2024, we took out a working capital loan with

Whitehawk for $5.0 million, with $2.0 million funded on April 19, 2024 and the remaining $3.0 million to be made available in June 2024 provided the Company is in compliance with certain covenants.

To the extent not previously converted into the Company’s Class A common stock, the outstanding shares of our Series B preferred stock are redeemable at the option of the holders at any time or from time to time commencing on January 1, 2024 upon, 30 days’ prior written notice to the Company, for a redemption price, payable in cash, equal to the sum of (a) ($10.00) multiplied by the number of shares of Series B preferred stock being redeemed (the “Redeemed Shares”), plus (b) all accrued and unpaid dividends, if any, on such Redeemed Shares.

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We are currently evaluating alternatives to refinance or restructure the Series B preferred shares including extending the maturity of the Series B preferred shares beyond the current optional conversion date.

Given the uncertainty surrounding global supply chains, global markets, and general global uncertainty as a result of the ongoing conflict between Russia and Ukraine and the continuing COVID-19 pandemic, the availability of debt and equity capital has been reduced and the cost of capital has increased.

Given the uncertainty surrounding global supply chains, global markets, and general global uncertainty as a result of the ongoing conflict between Russia and Ukraine, the availability of debt and equity capital has been reduced and the cost of capital has increased.

Furthermore, recent adverse developments affecting the financial services industry including events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions may lead to market-wide liquidity problems.

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However, while there can be no guarantee we will be able to access capital when needed, 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 our customers and vendors.

Cash and cash equivalents, along with anticipated cash flows from operations, are expected to provide sufficient liquidity for working capital needs and debt service requirements.

Cash and cash equivalents, along with anticipated cash flows from operations and recent financing arrangements with our lenders are expected to provide sufficient liquidity for working capital needs and debt service requirements.

The Company’s financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of obligations in the normal course of business.

The Company was not in compliance with its Senior Leverage Ratio financial covenant under the Credit Agreement at September 30, 2023.

The non-compliance was cured by the Company paying $4.3 million, inclusive of $0.3 million in prepayment penalties and interest in November 2023 in order to bring the Company into compliance with the Senior Leverage Ratio at September 30, 2023.

The Senior Leverage Ratio, as stated in the Third Amendment to the Credit Agreement, decreases to 2.50 at December 31, 2023, 2.00 at March 31, 2024 and June 30, 2024 and 1.75 thereafter.

The Company was not in compliance with its financial covenant related to the Senior Leverage Ratio under the Credit Agreement at December 31, 2023.

Although on March 14, 2024, the Loan Parties entered into the Fifth Amendment with the Collateral Agent and the Lender mainly for the purpose of (1) amending and restating the Senior Leverage Ratio and Minimum Liquidity (as defined in the Fifth Amendment), and (2) waiving any Event of Default that may have arisen directly as a result of the Financial Covenant Default (as defined in the Fifth Amendment), there can be no assurance that the Lender will not declare an event of default and acceleration of all of our obligations under the Credit Agreement in the event we are unable to get into full compliance with these covenants in the future.

Following the Fifth Amendment to the Credit Agreement, the Senior Leverage ratio increased to 6.00 at March 31, 2024, remained at 2.00 at June 30, 2024 and 1.75 thereafter.

Because of the significant decreases in the required Senior Leverage Ratio within the next twelve months, the Company’s current forecast projects the Company may not be able to maintain compliance with this ratio.

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Revenue Recognition

Goodwill and Intangible assets

As of June 30, 2023, we determined that a triggering event had occurred as a result of our market capitalization that suggested one or more of the reporting units may have fallen below the carrying amounts.

In addition, changes in our reporting segments resulted in a change in the composition of our reporting units.

As a result of these changes, we determined the Company had two reporting units for purposes of testing based upon entities that comprise the Americas and EMEA reporting segments.

For purposes of impairment testing, we allocated goodwill to the reporting units based upon a relative fair value allocation approach and assigned approximately $22.4 million and $2.8 million of goodwill to the America and EMEA reporting units, respectively.

As of June 30, 2023, we performed an interim goodwill impairment test as a result of the triggering events identified.

In analyzing goodwill for potential impairment in the quantitative impairment test, we used a combination of the income and market approaches to estimate the fair value.

Under the income approach, we calculated the fair value based on estimated future discounted cash flows.

The assumptions used are based on what we believe a hypothetical marketplace participant would use in estimating fair value and include the discount rate, projected average revenue growth and projected long-term growth rates in the determination of terminal values.

Under the market approach, we estimated the fair value based on market multiples of revenue or earnings before interest, income taxes, depreciation, and amortization for benchmark companies.

Based on the results of our interim test as of June 30, 2023, we concluded that the estimated fair value of each reporting unit exceeded the respective carrying value and, as such, we concluded that the goodwill assigned to each reporting unit, as of June 30, 2023, was not impaired.

However, we concluded that as of June 30, 2023, our Americas reporting unit was at risk of failing step one of the goodwill impairment test.

As of June 30, 2023, we determined that our Americas reporting unit had an estimated fair value in excess of its respective carrying value of approximately 4%.

The estimated fair value of our reporting units are closely aligned with the ultimate amount of revenue and operating income that it achieves over the projected period.

Our discounted cash flows, for goodwill impairment testing purposes, assumed that, through fiscal year 2028, this reporting unit would achieve a compounded annual revenue growth rate of approximately 5.0% from its forecasted 2023 revenue.

Beyond fiscal 2028, we assumed a long-term revenue growth rate of 3.0% in the terminal year.

As of June 30, 2023, we utilized a WACC of 14.0% for the Americas reporting unit.

Given expected growth projections from industry sources, we believe these modest long-term growth rates and the WACC are appropriate to use for our future cash flow assumptions.

We also believe that it is possible that our actual revenue growth rates could be significantly higher due to a number of factors, including:

availability of government funding allocated to the education sector as a result of the CARES Act and other recent economic relief stimulus packages;

(ii) the growth of education technology products and services outside of flat-panel sales such as audio, STEM products and professional services;

and (iii) the continued growth in sales to enterprise customers.

Modest changes in other key assumptions used in our June 30, 2023 impairment analysis may result in the requirement to proceed to step two of the goodwill impairment test in future periods.

If this reporting unit fails step one in the future, we would be required to perform step two of the goodwill impairment test.

If we perform step two, up to $22.5 million of goodwill assigned to the Americas reporting unit could be written off in the period that the impairment is triggered.

During the quarter ended September 30, 2023, due to further declines in the Company’s market capitalization and a reduction in cash-flows resulting from continued softening in the industry leading to a reduction in sales from interactive flat-panel displays, the Company determined that a triggering event had occurred.

As of September 30, 2023, the Company performed an interim goodwill impairment test as a result of the triggering event identified.

The Company’s methodology for estimating fair value was consistent with the income and market approaches used as of June 30, 2023.

Certain estimates and assumptions, including the Company’s operating forecast for 2023 and future periods, were revised based on current industry and Company trends.

For the three and nine months ended September 30, 2023, the Company recorded goodwill impairment charges of $10.4 million and 2.8 million to the Americas and EMEA reporting units, respectively, which also represents total accumulated goodwill impairment charges for each reporting unit.

Intangible Assets

Stock-based Compensation Expense

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis