Boxlight Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 15, 2017. Financial statements are unaudited. Comparative 2016 results were retrospectively adjusted for the Mimio and Genesis acquisitions; Boxlight Group, acquired in July 2016, was not included in Q1 2016.
Business context
Boxlight sells interactive educational technology, including projectors, displays, software and STEM products, and related services. It also targets business and government collaboration markets. Management cited integration of acquired businesses, cross-selling and expansion of sales capacity as growth initiatives.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $4.19 million | $3.08 million |
| Gross profit | $1.20 million | $1.26 million |
| Gross margin | 28.6% | 41.0% |
| Operating expenses | $2.64 million | $1.77 million |
| Operating loss | $(1.44) million | $(0.51) million |
| Net loss | $(1.56) million | $(0.55) million |
| Basic and diluted loss per share | $(0.34) | $(0.13) |
| Cash used in operating activities | $(0.11) million | $(0.22) million |
At March 31, 2017, cash was $402,000, total current assets were $8.11 million and current liabilities were $14.11 million, producing a working-capital deficit of $6.00 million. Total liabilities were $18.45 million and stockholders’ equity was $576,000. Reported debt balances included $2.07 million of short-term debt, $682,000 of short-term related-party debt, $1.05 million of current related-party convertible notes and $4.10 million of long-term related-party convertible notes.
Changes versus the prior comparable period
- Revenue rose 36%, primarily because Q1 2017 included Boxlight Group. Management said the acquired business’s lower margins, lower Mimio customer sales, unusually high prior-year Mimio margins and increased air-freight expense contributed to lower gross profit and margin.
- General and administrative expense increased 71% to $2.45 million, reflecting Boxlight Group expenses and IPO-related professional fees. Research and development expense declined to $190,000 from $337,000.
- Net loss widened by approximately $1.01 million. Interest expense increased to $169,000 from $45,000, which management attributed to debt issued in late 2016.
- Operating cash use improved by approximately $103,000 year over year, but cash declined $55,000 during the quarter to $402,000. Financing included a $1.0 million K-Laser convertible note; operating cash flow was also affected by changes in payables and prepaid assets.
Outlook, liquidity, risks and unusual items
- Going concern: Management reported substantial doubt about the company’s ability to continue as a going concern, citing the $6.00 million working-capital deficit, accumulated deficit of $7.05 million, defaulted debt, and dependence on shareholder support, debt arrangements, equity financing and achieving profitable operations. The filing says the company was seeking funds through its IPO and majority-shareholder support.
- Defaults and secured claims: The $1.46 million Skyview note was past due and in default; Skyview held a senior security interest over Mimio assets. The company had not consummated a proposed settlement by the filing date and said it could not pay the required $700,000. The disclosed proposal required exchange listing and payment by May 31, 2017; absent those conditions, the note could increase to as much as $2.0 million and become immediately due. The AHA note, with $611,000 principal outstanding, was also in default for missed payments. Crestmark’s line of credit was repaid and released in February 2017 after a January default notice.
- Funding and dilution: Related-party and convertible financing is significant. On May 11, 2017, EDI replaced its $2.0 million note with a new unsecured convertible note carrying a 55%-of-IPO-price conversion feature. The K-Laser $1.0 million note is secured by company assets and due December 2017. Conversion terms and preferred shares may materially dilute common shareholders.
- Management commentary: Management reported a record-high sales pipeline, increased U.S. demand and sales opportunities from integrating acquired products. It expected IPO proceeds to support inventory needed for existing orders. These are forward-looking statements, not quantified guidance; no specific revenue or earnings forecast is provided.
- Concentration: One customer represented 15% of Q1 revenue. Two vendors represented 66% and 20% of purchases. EDI, an affiliate of a major shareholder, was a significant supplier; related-party payables to EDI were $4.87 million at quarter-end.
- Other items: A supplier lawsuit over approximately $72,000 of payables had resulted in an increased judgment of about $70,000 plus interest and costs; the company was negotiating new terms. Management concluded disclosure controls were not effective, citing the lack of a functioning audit committee and inadequate independent-board oversight. No material changes to internal control over financial reporting were reported during the quarter.
Important facts for investors to verify
- Whether the company obtained sufficient financing or IPO proceeds to fund operations and address the going-concern conditions.
- The status and final terms of the Skyview default and settlement, including any enforcement against collateral and related payment obligations.
- Repayment, extension or conversion of defaulted and near-term debt, including the AHA and K-Laser notes.
- Actual gross-margin performance, cash generation, inventory needs and sales conversion from the reported pipeline.
- Potential dilution from convertible notes, preferred stock and other equity-linked obligations, and progress in correcting ineffective disclosure controls.