Boxlight Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 13, 2019. Boxlight designs, produces and distributes interactive technology and STEM products, primarily for the education market. Results are unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $11.10 million | $9.66 million | $16.11 million | $15.66 million |
| Gross profit | $3.25 million | $1.73 million | $4.83 million | $3.21 million |
| Gross margin | 29% | 18% | 30% | 20% |
| Operating loss | $0.97 million | $2.18 million | $3.38 million | $3.98 million |
| Net loss | $1.16 million | $4.46 million | $5.85 million | $5.36 million |
| Basic and diluted loss per share | $0.11 | $0.45 | $0.56 | $0.55 |
Q2 revenue rose 15%; first-half revenue increased 3%. Management attributed improved margins to the prior-year delivery of two large, low-margin projects. First-half net loss widened as higher interest expense and derivative fair-value losses more than offset stronger gross profit. Q2 net loss narrowed, partly because the prior-year quarter included a $2.19 million derivative fair-value loss; the 2019 quarter recorded a $0.26 million gain.
Cash flow and liquidity: First-half operating cash use was $4.00 million, compared with $2.31 million in 2018. Investing activities provided $10,000; financing activities provided $4.05 million. Cash at June 30 was $945,389. Working capital was negative $5.05 million. Net trade receivables were $7.39 million, up from $3.63 million at year-end 2018.
Debt and balance sheet: Total debt was $6.58 million, versus $3.01 million at December 31, 2018; $4.08 million was classified as short-term third-party debt and $436,000 as short-term related-party debt. Total liabilities were $20.50 million and stockholders’ equity was $3.49 million. The company reported an accumulated deficit of $25.06 million. The $4.00 million Lind financing was issued as a $4.40 million secured convertible note, with 8% annual interest, a 24-month maturity and conversion at $4.00 per share.
Non-GAAP measures: First-half EBITDA was a loss of $4.62 million and adjusted EBITDA a loss of $2.40 million, compared with losses of $4.63 million and $2.36 million, respectively, in 2018. Q2 adjusted EBITDA loss was $562,000, versus $1.23 million in 2018. These are management-defined non-GAAP measures, not substitutes for GAAP results.
Material changes and business developments
- In March 2019, Boxlight acquired Modern Robotics, a STEM, robotics and programming education business, for 200,000 shares and a $70,000 note. The acquisition’s purchase-price allocation was provisional.
- First-half G&A expense increased to $7.65 million from $6.92 million, and R&D expense increased to $561,000 from $270,000. Management associated increases with acquired businesses, including Qwizdom and EOS.
- Derivative liabilities rose to $2.27 million from $326,000 at year-end, primarily reflecting fair-value changes, including effects of warrant repricing provisions. The first-half fair-value charge was $1.90 million.
- Accounts payable and accrued expenses to related parties totaled $5.39 million; the filing identifies $5.25 million payable to EDI, an affiliate of a major shareholder and a supplier.
Outlook, risks and unusual items
- Going concern: Management states substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance. It cites the working capital deficit, first-half net loss and operating cash use, and dependence on shareholder support or additional debt or equity financing. The statements include no adjustments that might be required if the company cannot continue as a going concern.
- Funding constraints: The company says it has limited vendor credit and prepays for most inventory purchases. Its receivables financing permits advances against 85% of eligible receivables, subject to a $6 million facility limit and recourse to the company. The Lind note is secured by company assets.
- Concentration: Two customers accounted for 20% and 13% of first-half 2019 revenue. Two vendors accounted for 27% and 17% of purchases. The filing warns that losing a major customer could materially harm results.
- Seasonality: Product shipments typically rise ahead of the school year, with inventory generally building in Q2 and receivables tending to peak in Q3. Management says it seeks contracts in Q4 and Q1 to offset seasonality.
- Controls: Disclosure controls and procedures were deemed ineffective due to material weaknesses involving insufficient accounting personnel to segregate preparation and review duties and insufficient written accounting and close procedures. Management nevertheless stated it believed the financial statements fairly presented the company’s results and condition.
- Guidance: The filing provides no quantified revenue, earnings or cash-flow guidance. Management described plans to integrate acquired products, expand sales capacity and pursue growth and profitability, but cautioned that forward-looking statements are subject to risks.
- Other matters: The filing reports no legal proceedings. It identifies two related-party notes as in default and an overdue LCC-Delaware line of credit as currently in default. No material impairment of intangible assets was identified in the periods presented.
Investor verification priorities
- Assess near-term liquidity, refinancing or equity needs, and the implications of the disclosed going-concern substantial doubt.
- Review the Lind note’s amortization, security, conversion and potential dilution terms, together with other debt maturities and defaults.
- Examine the quality and collectability of the sharp increase in receivables and the company’s reliance on receivables-backed financing.
- Track whether higher gross margins persist, given management’s attribution of improvement partly to comparison with prior-year low-margin projects.
- Monitor customer and supplier concentration, related-party balances, and remediation of the disclosed material weaknesses.
- Confirm the final purchase accounting and integration results for Modern Robotics and other acquisitions.