Boxlight Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 14, 2017. Financial statements are unaudited. Comparatives were retrospectively adjusted for Mimio and Genesis; Boxlight Group, acquired in July 2016, was not included in the 2016 comparable results.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $5.98 million | $4.42 million | $10.18 million | $7.49 million |
| Gross profit | $1.71 million | $1.83 million | $2.91 million | $3.09 million |
| Gross margin | 28.6% | 41.5% | 28.6% | 41.3% |
| Operating income (loss) | $(0.70) million | $0.35 million | $(2.14) million | $(0.16) million |
| Net income (loss) | $(0.81) million | $0.31 million | $(2.38) million | $(0.24) million |
| Net loss per share, basic and diluted | $(0.18) | $0.07 | $(0.51) | $(0.05) |
- Cash flow: Six-month operating cash flow was positive $307,810, versus negative $64,063 in 2016. Investing cash flow is not separately shown in the supplied cash flow statement. Financing cash flow was positive $84,709, compared with negative $593,625. Cash increased $368,070 to $824,572.
- Balance sheet and liquidity: At June 30, cash was $824,572; current assets $7.71 million; current liabilities $12.75 million; working-capital deficit $5.04 million; total assets $18.41 million; total liabilities $17.10 million; and stockholders’ equity $1.31 million.
- Debt: Balance-sheet carrying amounts included $2.07 million short-term debt, $0.68 million short-term related-party debt, $1.05 million current related-party convertible notes, and $4.14 million long-term related-party convertible notes. The Skyview note and AHA note were in default. K-Laser provided a $1.0 million secured convertible note, due December 31, 2017, at 8% interest.
Material changes versus the prior period
- Six-month revenue rose 35.8%, principally because the 2017 results included Boxlight Group for the full period. Revenue also rose in Q2, but gross profit fell and net results deteriorated.
- Management attributed lower margins to Boxlight Group’s lower-margin business mix, reduced sales to Mimio customers compared with the unusually high-margin 2016 period, and greater use of air freight to meet customer needs.
- Six-month general and administrative expense increased to $4.75 million from $2.65 million, reflecting Boxlight Group’s inclusion and IPO-related professional fees. Research and development expense decreased to $0.30 million from $0.60 million.
- Inventory declined to $2.52 million from $4.16 million at year-end, while prepaid expenses and other current assets rose to $1.20 million from $0.45 million, largely due to vendor prepayments.
Outlook, risks, contingencies, and unusual items
- Going concern: Management disclosed substantial doubt about the Company’s ability to continue as a going concern, citing the working-capital deficit, accumulated deficit of $7.86 million, dependence on shareholder support, need for equity financing and profitability, and debt obligations in default. The Company said it was seeking IPO proceeds and majority-shareholder support; the filing gives no quantified forecast or assurance of funding.
- Default and litigation: Skyview sued on June 1, 2017 over the $1.46 million note balance, plus accrued interest, and sought foreclosure on assets now operated by Boxlight, Inc. The Company was seeking external financing to repay the debt. AHA’s $610,783 principal balance was also in default for missed payments.
- Concentration and related parties: One customer represented 17% of six-month revenue. Two vendors represented 41% and 25% of purchases. EDI, an affiliate of a major shareholder, supplied $2.02 million of purchases in the six-month period and was owed $3.32 million at June 30. The Company also reported $485,000 of unrepaid advances intended for proposed share purchases.
- IPO-related conversions and dilution: Agreements contemplated conversion of the Marlborough and EDI notes and accrued interest into common shares at $6.30 per share upon a specified registration-statement event. The filing also describes other preferred-stock conversions and equity obligations tied to the IPO.
- Seasonality and operations: Management said shipments typically peak before the school year, usually June through September. It reported using drop shipments and immediate fulfillment of incoming inventory to address backorders, and said sales hiring and cross-selling were supporting a record-high pipeline. These statements are not quantified guidance.
- Controls: Management concluded disclosure controls were ineffective, citing the absence of a functioning audit committee and insufficient independent board oversight. The evaluation section says the assessment was as of March 31, 2014, an apparent date inconsistency in a 2017 filing.
- Other contingencies: The filing describes an approximately $70,000 supplier judgment under negotiation, operating lease payments of $428,100 for the remainder of 2017 and later periods, and a $250,000 trademark-related liability. No material intangible-asset impairment was reported.
Most important facts for investors to verify
- Whether the Company obtained IPO or other financing, and whether it repaid, restructured, or faced enforcement on the Skyview and AHA defaults.
- Whether going-concern conditions were alleviated and how the Company funded operations after June 30, 2017.
- Whether margin pressure, expedited freight costs, customer concentration, and vendor dependence persisted.
- The actual dilution and terms arising from note conversions, preferred shares, warrants, and other IPO-linked equity commitments.
- Whether management corrected the stated controls-assessment date and addressed the disclosed control and board-oversight deficiencies.