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 (“MD&A”) should be read in conjunction with the financial statements and the related notes thereto included elsewhere herein. The 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 report. The actual 30 Table of Contents 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 be indicative of 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. Unless the context otherwise requires, the terms “the Company,” “we,” “us,” and “our” in this Quarterly Report refer to Boxlight Corporation and its consolidated direct and indirect subsidiaries, and the term “Boxlight” refers to Boxlight Inc., a Washington corporation and a wholly owned subsidiary of Boxlight Corporation. The terms “quarter” and “year to date” refer to our quarter ending September 30 th . FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q (including the section regarding Management’s Discussion and Analysis and Results of Operations, the "Quarterly Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only prediction, and are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things • our ability to comply with certain covenants, minimum liquidity and borrowing base requirements under our existing credit agreement and our ability to continue to operate as a going concern; • our indebtedness, a substantial amount of which is bearing interest at a variable rate; • our ability to maintain a listing of our Class A common stock on Nasdaq Capital Market; • changes in the sales of our display products; • seasonal fluctuations in our business; • changes in our working capital requirements and cash flow fluctuations; • competition in our industry; • our ability to enhance our products and to develop, introduce and sell new technologies and products at competitive prices and in a timely manner; • our reliance on resellers and distributors to promote and sell our products; • the success of our strategy to increase sales in the business and government market; • changes in market saturation for our products; • challenges growing our sales in foreign markets; • our dependency on third-party suppliers; 31 Table of Contents • our reliance on highly skilled personnel; • our ability to enter into and maintain strategic alliances with third parties; • unfavorable global economic or political conditions, including the ongoing conflict between Russia and Ukraine, and Israel and Hamas; • war, terrorism, other acts of violence, or potential effects of future pandemics; • a breach in security of our electronic data or our information technology systems, including any cybersecurity attack; • our ability to keep pace with developments in technology; • changes in the spending policies or budget priorities for government funding of schools, colleges, universities, other education providers or government agencies; • consumer product and environmental laws; • risks inherently related to our foreign operations; • our compliance with the Foreign Corrupt Practices Act; • income taxation for our worldwide operations; • our ability to ship and transport components and final products efficiently and economically across long distances and borders; • compliance with export control laws; • fluctuations in foreign currencies; • unstable market and economic conditions and potential disruptions in the credit markets; • defects in our products and detection thereof; • patents or other intellectual property rights necessary to protect our proprietary technology and business; • assertions against us relating to intellectual property rights; • our ability to anticipate consumer preferences and successfully develop attractive products; • our ability to develop, implement and maintain an effective system of internal control over financial reporting; • and those other risks referenced herein, including those risks referred to in Part II, Item 1A–“Risk Factors” in this Quarterly Report and those risks discussed in our other filings with the Securities and Exchange Commission (“SEC”), including those risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which discussion is incorporated herein by this reference. Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this Quarterly Report and the documents that we reference in this Quarterly Report and have filed as exhibits thereto completely and with the understanding that our actual future results may be materially different from what we expect. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. 32 Table of Contents 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. 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. Our Americas segment consists primarily of the operations of Boxlight, Inc. and its subsidiaries, and the Rest of World segment consists primarily of the operations of Boxlight Australia , PTY LTD (“Boxlight Australia”) . Each of our operating segments are primarily engaged in the sale of education technology products and services in the education market but which are also sold into the health, government and corporate sectors and derive a majority of their revenues from the sale of flat-panel displays, audio and other hardware accessory products, software solutions and professional services. Generally, our displays produce higher net operating revenues but lower gross profit margins than our accessory solutions and professional services. To date, we have generated substantially all of the Company’s revenue from the sale of hardware (primarily consisting of interactive displays and audio products) 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, and • Expanding our reseller partner network both in key territories and in new markets, thereby increasing our penetration and reach. Acquisition Strategy and Challenges The Company completed multiple acquisitions from 2015 through 2021 and may target additional acquisition opportunities in the future. 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 our existing business. The process to undertake a potential acquisition is time-consuming and costly. In the event we pursue additional acquisitions, 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. 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; and • Improved market reach and industry visibility – increasing our customer base and entry into new markets. 33 Table of Contents 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 displays), 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 service 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 for 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: competitive pricing within the industry, product, channel and geographical revenue mix; changes in product costs related to the release of projector models; and component, contract manufacturing and supplier pricing, freight, duties, and other shipping costs, 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. 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. 34 Table of Contents 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 (expense) income, net 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, 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. 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 September 30, 2024 and 2023 Revenues. Total revenues for the three months ended September 30, 2024 were $36.3 million as compared to $49.7 million for the three months ended September 30, 2023, resulting in a 26.9% decrease. The decrease in revenues was primarily due to lower sales volume across all markets primarily resulting from lower global demand for interactive flat panel displays. Cost of Revenues. Cost of revenues for the three months ended September 30, 2024 were $24.0 million as compared to $31.7 million for the three months ended September 30, 2023, resulting in a 24.1% decrease. The decrease in cost of revenues was attributable to the decrease in units sold. Gross Profit. Gross profit for the three months ended September 30, 2024 was $12.3 million as compared to $18.0 million for the three months ended September 30, 2023, a decrease of 32.0%. The gross profit margin was 33.8% for the three months September 30, 2024 and 36.3% for the three months ending September 30, 2023. The decrease in gross profit margin percentage is primarily related to competitive industry pricing in the interactive flat panel market coupled with a shift in product mix as audio revenues comprised a smaller percentage of total sales for the quarter compared with the prior year. General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2024 were $12.1 million, representing 33.3% of revenue as compared to $15.4 million or 31.0% of revenue for the three months ended September 30, 2023. The decrease was due to planned initiatives to reduce operating expenses across all cost groups, with the largest declines in employee-related expenses of $2.0 million, sales and marketing expense of $0.4 million, travel expense of $0.3 million, depreciation and amortization expense of $0.2 million, and stock compensation expense of $0.2 million. Research and Development Expenses. Research and development expenses were $1.0 million and $979 thousand for the three months ended September 30, 2024 and 2023 , respectively, and representing 2.8% of revenue for the three months ended September 30, 2024, and 2.0% of revenue for the three months ended September 30, 2023. Other Income (Expense). Other expense, net for the three months ended September 30, 2024 was $2.2 million as compared to $3.1 million for the three months ended September 30, 2023 , representing a decrease of $0.9 million . Other income for the three months ended September 30, 2024 consisted primarily of realized foreign currency gains and losses. Other expense consists primarily of interest expense on our term loan. 35 Table of Contents Income Tax Benefit (Expense). Income tax benefit for the three months ended September 30, 2024 was $12 thousand , as compared to income tax expense of $3.1 million for the three months September 30, 2023 . The decrease in tax expense year-over-year is largely due to foreign pretax book income for the three months ended September 30, 2024 as compared to foreign pretax loss for the three months ended September 30, 2023 . Net (Loss) Income. Net loss was $3.1 million and $17.8 million for the three months ended September 30, 2024 and September 30, 2023 and was a result of the changes noted above. For the nine-month periods ended September 30, 2024 and 2023 Revenues. Total revenues for the nine months ended September 30, 2024 were $111.9 million as compared to $137.9 million for the nine months ended September 30, 2023, resulting in a 18.9% decrease. The decrease in revenues was due to lower sales volum e across all markets primarily resulting from lower global demand for interactive flat panel displays. Cost of Revenues. Cost of revenues for the nine months ended September 30, 2024 were $72.3 million as compared to $86.9 million for the nine months ended September 30, 2023, resulting in a 16.8% 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, 2024 was $39.6 million as compared to $51.0 million for the nine months ended September 30, 2023, a decrease of 22.3%. Gross profit margin was 35.4% for the nine months ended September 30, 2024 and 37.0% for the nine months ended September 30, 2023. The decrease in gross profit margin is primarily related to the continuous increase in pricing pressure within the industry as well as 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, 2024 were $39.7 million, representing 35.4% of revenue as compared to $45.4 million representing 32.9% of revenue for the nine months ended September 30, 2023. The decrease in general and administrative expenses for the period ended September 30, 2024 was due to planned initiatives to reduce operating expenses across all cost groups, with the largest declines in employee-related expenses of $2.4 million, sales and marketing expense of $0.8 million, stock compensation expense of $0.6 million, depreciation and amortization expense of $0.7 million, and travel expense of $0.6 million. Research and Development Expenses. Research and development expenses for the nine months ended September 30, 2024 and 2023 were $3.2 million and $2.1 million, respectively and represented 2.8% and 1.5% of revenue, respectively. The increase can be attributable to the allocation of certain general and administrative expenses to new and ongoing research and development projects. Other Expense. Other expense, net for the nine months ended September 30, 2024 was $7.6 million as compared to $8.4 million for the nine months ended September 30, 2023 , representing a decrease of $0.8 million. Other expense consists primarily of interest expense on our term loan. Income Tax Expense. Income tax expense for the nine months ended September 30, 2024 was $767 thousand, as compared to a $3.4 million for the nine months ended September 30, 2023. The decrease in tax expense is primarily due to an increase in the forecasted worldwide net loss as compared to the prior year. Net Loss. Net loss was $11.6 million and $21.5 million for the nine months ended September 30, 2024 and 2023, respectively, and was a result of the changes noted above. Use of Non-GAAP financial measures 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 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 36 Table of Contents derivative liabilities, purchase accounting impact of fair valuing inventory and deferred revenue, goodwill impairment 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. 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. The following table contains reconciliations of net losses to EBITDA and adjusted EBITDA for the periods presented: (in thousands) Three Months Ended September 30, 2024 Three Months Ended September 30, 2023 Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Net Loss $ (3,061) $ (17,750) $ (11,628) $ (21,485) Depreciation and amortization 2,075 2,332 6,187 6,893 Interest expense (benefit) 2,550 2,987 7,723 8,222 Income tax expense (12) 3,073 767 3,379 EBITDA $ 1,552 $ (9,358) $ 3,049 $ (2,991) Stock compensation expense 441 671 1,233 1,823 Change in fair value of derivative liabilities (6) (90) (202) (50) Purchase accounting impact of fair valuing inventory — 113 225 336 Purchase accounting impact of fair valuing deferred revenue 208 366 778 1,308 Severance charges — — 943 — Impairment of goodwill — 13,226 — 13,226 Adjusted EBITDA $ 2,195 $ 4,928 $ 6,026 $ 13,652 Discussion of Effect of Seasonality on Financial Condition Certain accounts in 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 each school year, we generally build up inventories during the second quarter of the year. As a result, inventories tend to be at their 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. Thereafter, during the first quarter, we do not generally need to restock inventories at the same inventory levels. Accounts receivable balances tend to be at the highest levels in the third quarter, at which point we record the highest level of sales. Liquidity and Capital Resources As of September 30, 2024, we had cash and cash equivalents of $10.5 million, a working capital balance of $45.8 million, and a current ratio of 2.10. As of September 30, 2023, we had $18.4 million of cash and cash equivalents, a working capital balance of $61.4 million, and a current ratio of 2.24. For the nine months ended September 30, 2024 and 2023, we had net cash used in and provided by operating activities of $2.1 million and $8.2 million, respectively. Cash used in operating activities primarily relates to net loss for the nine months ended September 30, 2024 as well as changes in working capital primarily related to a reduction in accounts payable in 2024 resulting from large inventory purchases in 2023. We had net cash used in investing activities of $279 thousand and $226 thousand for the nine months ended September 30, 2024 and 2023, respectively. Cash used in investing activities is related to purchases of property and equipment. For the nine months ended September 30, 2024 and 2023, we had net cash used in financing activities of $4.4 million and $3.0 million, respectively. Cash used in financing activities in 2024 is related to principal payments on debt of $7.4 million and $0.9 million in payments of fixed dividends to our Series B preferred shareholders, partially offset by $4.0 million proceeds from short-term debt. 37 Table of Contents Our liquidity needs are funded by operating cash flows and available cash. Our cash requirements consist primarily of day-to-day operating expenses, capital expenditures and contractual obligations with respect to facility leases. We lease all of 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 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. 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 pursuant to our Credit Agreement with Whitehawk. On April 19, 2024, as a part of the Sixth Amendment to the Credit Agreement, we entered into 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 was in compliance with certain covenants. On July 2, 2024, we requested and received $2 million of the $3 million working capital bridge loan. We were required to pay a fee equal to 6% of the aggregate amount of borrowings under the Sixth Amendment. Both working capital bridge loans are due and payable in full on November 29, 2024. During the three months ended September 30, 2024, we repaid $3.5 million of the $4.0 million additional borrowings under the Sixth Amendment. In October 2024, we repaid the remaining $0.5 million borrowings under the Sixth Amendment and $0.2 million in financing fees related to the borrowing. 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. We may be required to seek alternative financing arrangements or restructure the terms of the agreement with the Series B preferred shareholders on terms that are not favorable to us if cash and cash equivalents are not sufficient to fully redeem the Series B preferred shares. 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. Our current levels of indebtedness and market conditions may affect our ability to access funding sources and credit arrangements in amounts adequate to finance our current and future business operations. Increasing our capital through equity issuance at this time could cause significant dilution to our existing stockholders. 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 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 and recent financing arrangements with our lenders are expected to provide sufficient liquidity for working capital needs and debt service requirements. Our 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. We were not in compliance with our financial covenant related to the Senior Leverage Ratio under the Credit Agreement at December 31, 2023. On March 14, 2024, we entered into the Fifth Amendment with the Collateral Agent and the Lender to (1) amend and restate the Senior Leverage Ratio and Minimum Liquidity (as defined in the Fifth Amendment), and (2) waive any event of default that may have arisen directly as a result of the Financial Covenant Default (as defined in the Fifth Amendment) at December 31, 2023. Under the Fifth Amendment, the Senior Leverage Ratio requirement at March 31, 2024 was amended from 2.00 to 6.00, at June 30, 2024 it remained at 2.00, and thereafter it remained at 1.75. We were also not in compliance with our Senior Leverage Ratio financial covenant under the Credit Agreement at June 30, 2024. On August 12, 2024, we entered into the Seventh Amendment with the Collateral Agent and the Lender to (1) reduce the intellectual property sublimit under the borrowing base from $15.0 million to $11.2 million, and (2) waive the event of default that may have arisen directly as a result of the Financial Covenant Default (as defined in the Seventh Amendment) at June 30, 2024. 38 Table of Contents We were also not in compliance with our Senior Leverage Ratio financial covenant under the Credit Agreement at September 30, 2024. Subsequent to the end of the third quarter of 2024, we were also not in compliance with our borrowing base covenant under the Credit Agreement for month ended October 31, 2024. On November 14, 2024, we obtained a waiver for the Credit Agreement from the Collateral Agent and Lender (the “November 2024 Waiver”) to waive any events of default that may have arisen directly as a result of (i) the Financial Covenant Default (as defined in the November 2024 Waiver) at September 30, 2024 and (ii) the Borrowing Base Default (as defined in the November 2024 Waiver) for the month ended October 31, 2024. In conjunction with obtaining the waiver, the Company paid down approximately $1.1 million under the Credit Agreement, inclusive of $60 thousand of prepayment penalties. 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 maintain full compliance with these covenants in the future. Because of the significant decreases in the required Senior Leverage Ratio that have occurred within the past twelve months, our current forecast projects that we may not be able to maintain compliance with this ratio. These conditions raise substantial doubt about the ability of the Company to continue as a going concern within one year after the date that the financial statements are issued. In view of this matter, continuation as a going concern is dependent upon our ability to continue to achieve positive cash flow from operations, obtain waivers or other relief under the Credit Agreement for any future non-compliance with the Senior Leverage Ratio, or refinance our Credit Agreement with a different lender on a basis with more favorable terms. We are actively working to refinance our debt with new lenders. While we are confident in our ability to refinance our existing debt, we do not have written or executed agreements as of the issuance of this Form 10-Q. Our ability to refinance our existing debt is based upon credit markets and economic forces that are outside of our control. We have a good working relationship with our current banking partner and have seen a positive trend in the credit markets as of late. However, there can be no assurance that we will be successful in refinancing our debt, or on terms acceptable to us. Because our Class A common stock is listed on Nasdaq, we must meet certain financial and liquidity criteria to maintain such listing. On February 28, 2024, we received a letter from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, based upon the closing bid price of our Class A Common Stock for the previous 30 consecutive business days, we no longer met the requirements of Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until August 26, 2024, to regain compliance with the Bid Price Rule. On August 27, 2024, Nasdaq advised us in writing that, while we had not regained compliance with the Bid Price Rule, we had been granted an additional 180 calendar day extension, or until February 24, 2025, to regain compliance with the Bid Price Rule. Nasdaq’s determination was based on our having met the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on The Nasdaq Capital Market, with the exception of the Bid Price Rule, and on our written notice to Nasdaq of our intention to cure the deficiency during the extended compliance period by effecting a reverse stock split, if necessary. If we do not regain compliance with the Bid Price Rule by the end of the extended compliance period, the Staff will provide written notification to us that our Class A Common Stock will be subject to delisting. At that time, we may appeal the Staff’s delisting determination to a hearings panel. There can be no assurance that we will regain compliance with the Bid Price Rule or that we will otherwise maintain compliance with any of the other listing requirements for The Nasdaq Capital Market. In the event our stock is delisted from Nasdaq, whether by choice or otherwise, the delisting of our Class A common stock could significantly impair our ability to raise capital and stockholder value. Financing See Note 8 – Debt for a discussion of our existing debt financing arrangements. 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 condensed consolidated financial statements are prepared in accordance with 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 related disclosures. We base our 39 Table of Contents assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our condensed consolidated 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 condensed consolidated financial statements and in Note 1 in the Company’s 2023 Annual Report, which was filed with the SEC on March 14, 2024. 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. Intangible Assets 3. Stock-based Compensation Expense 4. Income Taxes Recent Accounting Pronouncements For information on accounting pronouncements that have impacted or are expected to materially impact our consolidated financial condition, results of operations or cash flows, see Note 1 to our unaudited condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosure About Market Risk As a “smaller reporting company,” this item is not required.