Boxlight Corporation (NASDAQ: BOXL) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company designs, produces and distributes interactive education technology, software, displays and STEM products. Its results include Modern Robotics, acquired in March 2019.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $11.60M | $10.20M | $27.71M | $25.86M |
| Gross profit / margin | $3.44M / 30% | $2.43M / 24% | $8.27M / 30% | $5.64M / 22% |
| Operating loss | $(1.17)M | $(1.93)M | $(4.55)M | $(5.91)M |
| Net loss | $(0.29)M | $(1.22)M | $(6.14)M | $(6.58)M |
| Basic and diluted loss per share | $(0.03) | $(0.12) | $(0.58) | $(0.66) |
- Q3 revenue increased 14%; nine-month revenue increased 7%. Gross margin improved in both periods, which management attributed to comparison with low-margin initial deliveries on two large 2018 projects, renegotiated freight and vendor costs, and a stronger mix of software and professional development services.
- For the nine months, operating expenses rose to $12.82M from $11.55M. General and administrative expense was $11.91M; research and development was $0.91M, up from $0.37M, partly due to software consulting and engineering costs.
- Q3 other income was $0.88M, including a $1.37M favorable change in derivative fair value, partly offset by $0.52M interest expense. For the nine months, other expense was $1.59M, including $1.28M interest expense and a $0.53M derivative fair-value loss. These valuation changes make reported net results more volatile.
- Nine-month operating cash outflow was $6.28M, versus $3.79M in 2018. Investing activities provided $0.01M; financing activities provided $6.21M. Cash declined to $0.81M from $0.90M at year-end. The cash-flow statement reports $1.16M of interest paid.
- At September 30, current assets were $14.22M and current liabilities $19.39M, a $5.17M working-capital deficit. Total debt was $8.82M, including $7.24M of third-party short- and long-term debt and $0.52M related-party debt. Cash was limited relative to near-term obligations.
Material changes, outlook and risks
- Financing and going concern: Management states that the accumulated deficit was $25.35M, nine-month net loss $6.14M, and operating cash use $6.28M. These conditions raise substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Management says it is seeking equity or debt financing and depends on shareholder support, financing access and achieving profitable operations.
- Debt: A March 2019 Lind Global financing provided $4.0M under a secured convertible note with $4.4M principal, 8% interest and a 24-month maturity. It is convertible at the investor’s option at $4.00 per share; principal payments are scheduled in monthly installments. Sallyport receivables financing had $4.38M outstanding and recourse rights, with a stated facility limit of $6.0M. The filing also identifies defaulted related-party notes.
- Working capital pressures: Trade receivables rose to $8.42M from $3.63M at year-end. Management notes seasonality, limited vendor credit and requirements to prepay for most inventory purchases; receivables-backed borrowing is an important liquidity source.
- Operating outlook: No quantified revenue, earnings or cash-flow guidance is provided. Management describes a strategy of integrating acquired products, expanding sales coverage and pursuing acquisitions; it reports a record-high sales pipeline. It also notes that education sales are seasonal, generally peaking before the school year.
- Concentrations and contingencies: Three customers each accounted for 13% of nine-month revenue. One vendor accounted for 34% of purchases; EDI, an affiliate of a major shareholder, is a significant supplier, with $5.08M payable at quarter-end. The company reported $0.82M of future minimum operating lease payments. Legal proceedings were reported as none.
- Reporting controls: Management concluded disclosure controls were ineffective due to material weaknesses involving insufficient accounting personnel to segregate preparation and review duties and insufficient written accounting and period-end reporting procedures. No material changes in internal control were reported during the quarter.
- Non-GAAP measures: Nine-month EBITDA was $(4.18)M and adjusted EBITDA $(2.76)M, compared with $(5.41)M and $(3.51)M in 2018. Q3 adjusted EBITDA was $(0.35)M versus $(1.15)M. These company-defined measures are not substitutes for GAAP results.
Important facts for investors to verify
- Near-term liquidity, cash runway, access to new financing and the company’s ability to meet debt payments and other obligations.
- Terms, collateral, repayment schedule and dilution implications of the Lind note and Sallyport receivables facility; status of defaulted related-party notes.
- Collection timing and credit quality of receivables, including the customer representing 13% of revenue with $2.62M receivable at quarter-end.
- Whether improved gross margins and sales growth persist, and whether the company can reduce operating losses and achieve positive operating cash flow.
- Progress addressing the disclosed material weaknesses in financial reporting controls and the effect of derivative fair-value changes on reported results.