UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| Quarterly Report UNDER Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the quarterly period ended
OR
| Transition Report UNDER Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______________ to ______________
Commission
file number
(Exact name of registrant as specified in its charter)
| 8211 | ||||
| (State or other jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer | ||
| incorporation or organization) | Classification Code Number) | Identification Number) |
Phone:
(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| ☒ | Smaller reporting company | |||||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.
Indicate
by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
The number of shares outstanding of the registrant’s common stock on November 9, 2021 was .
BOXLIGHT CORPORATION
TABLE OF CONTENTS
| 2 |
PART I. Financial Information
Item 1. Financial Statements
Boxlight Corporation
Consolidated Condensed Statements of Operations and Comprehensive Loss
For the nine months ended September 30, 2021, and 2020
(Unaudited)
(in thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expense: | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expense | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Changes in fair value of derivative liabilities | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss from settlements of liabilities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before income taxes | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Income tax expense | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Fixed dividends - Series B Preferred | ( | ) | ( | ) | ||||||||||||
| Deemed Contribution -Series B Preferred | ||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Comprehensive loss: | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Foreign currency translation (loss) gain | ( | ) | ( | ) | ||||||||||||
| Total comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net income (loss) per common share – basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) per common share – diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average number of common shares outstanding – basic | ||||||||||||||||
| Weighted average number of common shares outstanding – diluted | ||||||||||||||||
See
accompanying notes to unaudited consolidated condensed financial statements.
| 3 |
Boxlight Corporation
Consolidated Condensed Balance Sheets
As of September 30, 2021 and December 31, 2020
(Unaudited)
(in thousands)
| September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable – trade, net of allowances | ||||||||
| Inventories, net of reserves | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net of accumulated depreciation | ||||||||
| Intangible assets, net of accumulated amortization | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accounts payable and accrued expenses – related parties | - | |||||||
| Short-term debt | ||||||||
| Earn-out payable – related party | - | |||||||
| Deferred revenues – short-term | ||||||||
| Derivative liabilities | ||||||||
| Other short-term liabilities | ||||||||
| Total current liabilities | ||||||||
| Deferred revenues – long-term | ||||||||
| Long-term debt | - | |||||||
| Deferred tax liability | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Mezzanine equity: | ||||||||
| Preferred Series B | ||||||||
| Preferred Series C | ||||||||
| Total mezzanine equity | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value, shares authorized; and shares issued and outstanding, respectively | - | - | ||||||
| Common stock, $ par value, shares authorized; and Class A shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to unaudited consolidated condensed financial statements.
| 4 |
Boxlight Corporation
Consolidated Condensed Statements of Changes in Stockholders’ Equity
For the three and nine months ended September 30, 2021
(unaudited)
(in thousands)
| Series A | Class A | Additional | Accumulated Other | |||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income | Deficit | Total | |||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
| Shares issued for: | ||||||||||||||||||||||||||||||||
| Stock options exercised | - | |||||||||||||||||||||||||||||||
| Conversion of accounts payable liabilities | - | |||||||||||||||||||||||||||||||
| Conversion of debt obligations | - | |||||||||||||||||||||||||||||||
| Conversion of Restricted Shares | - | |||||||||||||||||||||||||||||||
| Warrants exercised | - | |||||||||||||||||||||||||||||||
| Stock compensation | - | |||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Fixed dividends Preferred Series B | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net loss | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||
| Shares issued for: | ||||||||||||||||||||||||||||||||
| Conversion of debt obligations | - | |||||||||||||||||||||||||||||||
| Conversion of Restricted Shares | - | |||||||||||||||||||||||||||||||
| Stock compensation | - | - | ||||||||||||||||||||||||||||||
| Shares issued for Interactive Concepts acquisition | - | |||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||
| Deemed Contribution - Preferred Series B | - | - | ||||||||||||||||||||||||||||||
| Fixed dividends - Preferred Series B | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
| Shares issued for: | ||||||||||||||||||||||||||||||||
| Conversion of debt obligations | - | |||||||||||||||||||||||||||||||
| Conversion of Restricted Shares | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Stock options exercised | - | |||||||||||||||||||||||||||||||
| Warrants exercised | ||||||||||||||||||||||||||||||||
| Stock compensation | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Fixed dividends Preferred Series B | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | |
$ | $ | $ | ( |
) | $ | |||||||||||||||||||||||
See accompanying notes to unaudited consolidated condensed financial statements.
| 5 |
Boxlight Corporation
Consolidated Condensed Statements of Changes in Stockholders’ Equity
For the three and nine Months Ended September 30, 2020
(unaudited)
(in thousands)
| Series A | Class A | Additional | Accumulated Other | |||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income | Deficit | Total | |||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||
| Shares issued for: | ||||||||||||||||||||||||||||||||
| In lieu of payment for services rendered | - | - | - | |||||||||||||||||||||||||||||
| Conversion of accounts payable liabilities | - | - | - | |||||||||||||||||||||||||||||
| Conversion of debt obligations | - | |||||||||||||||||||||||||||||||
| Stock compensation | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance as of March 31, 2020 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||
| Shares issued for: | ||||||||||||||||||||||||||||||||
| Conversion of accounts payable liabilities | - | |||||||||||||||||||||||||||||||
| Conversion of debt obligations | - | - | - | |||||||||||||||||||||||||||||
| Conversion of Restricted Shares | - | |||||||||||||||||||||||||||||||
| Stock compensation | - | - | ||||||||||||||||||||||||||||||
| Shares issued for Stemify acquisition | - | |||||||||||||||||||||||||||||||
| Public Offering | - | |||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | - | ( |
( |
) | ||||||||||||||||||||||||||
| Net loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||||||||
| Shares issued for: | ||||||||||||||||||||||||||||||||
| Acquisition of Preferred C shares | - | - | ||||||||||||||||||||||||||||||
| Conversion of notes payable | - | |||||||||||||||||||||||||||||||
| Closing fees for issuance of notes payable | - | |||||||||||||||||||||||||||||||
| Public offering | - | |||||||||||||||||||||||||||||||
| Stock compensation | - | |||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | - | |
||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | |
$ | ( |
) | $ | ||||||||||||||||||||||||
| 6 |
Boxlight Corporation
Consolidated Condensed Statements of Cash Flows
For the nine months ended September 30, 2021 and 2020
(unaudited)
(in thousands)
| Nine Months Ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used) in operating activities: | ||||||||
| Amortization of debt discount and issuance cost | ||||||||
| Bad debt (recovery) expense | ( | ) | ||||||
| Loss on settlement of liabilities | ||||||||
| Change in allowance for sales returns and volume rebate | ( | ) | ||||||
| Change in inventory reserve | ||||||||
| Change in deferred tax assets and liabilities | - | |||||||
| Change in fair value of derivative liability | ||||||||
| Shares issued for interest payment on notes payable | ||||||||
| Stock compensation expense | ||||||||
| Other share-based payments | - | |||||||
| Depreciation and amortization | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable – trade | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Warranty liability | ( | ) | ||||||
| Accounts payable and accrued expenses - related parties | - | |||||||
| Other short-term liabilities | ||||||||
| Deferred revenues | ( | ) | ||||||
| Other liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | $ | ( | ) | $ | ( | ) | ||
| Cash flows from investing activities: | ||||||||
| Business acquisitions (net of cash acquired) | ( | ) | ( | ) | ||||
| Cash paid for patents | - | ( | ) | |||||
| Cash paid to settle earnout obligations | ( | ) | - | |||||
| Purchases of furniture and fixtures, net | ( | ) | - | |||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net proceeds from issuance of common stock | ||||||||
| Proceeds from payment protection plan loan | - | |||||||
| Proceeds from short-term debt | ||||||||
| Principal payments on short-term debt | ( | ) | ( | ) | ||||
| Payment on fixed dividends of class B preferred stock | ( | ) | - | |||||
| Proceeds from convertible debt | - | |||||||
| Debt issuance costs | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | $ | $ | ||||||
| Effect of foreign currency exchange rates | ( | ) | ( | ) | ||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of the period | ||||||||
| Cash and cash equivalents, end of the period | $ | $ | ||||||
| Supplemental cash flow disclosures: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Non-cash investing and financing transactions: | ||||||||
| Shares issued to settle accounts payable | $ | $ | ||||||
| Shares issued for conversion of notes payable and accrued interest | $ | $ | ||||||
| Shares issued for closing fees related to outstanding notes payable | ||||||||
| Shares issued for acquisition | $ | $ | ||||||
| Preferred share issued as consideration for acquisition of Sahara | ||||||||
| Exercise of warrants | $ | $ | ||||||
| Deemed contribution - Series B Preferred | $ | $ | ||||||
| Deferred consideration for acquisition | $ | $ | ||||||
| Notes payable issued as consideration for acquisition of MyStemKit | $ | $ | ||||||
See accompanying notes to unaudited consolidated condensed financial statements.
| 7 |
Boxlight Corporation
Notes to the Unaudited Consolidated Condensed Financial Statements
NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND RECENT ACQUISITIVE GROWTH
Boxlight Corporation (“Boxlight”) designs, produces, and distributes interactive technology solutions to the education, corporate and government markets under its Clevertouch and Mimio brands. The Company’s solutions include interactive displays, collaboration software, supporting accessories and professional services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements include the accounts of Boxlight and its wholly owned subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated condensed financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim unaudited consolidated condensed financial information and interim financial reporting guidelines and rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and notes required by GAAP for complete consolidated condensed financial statements. The unaudited consolidated condensed financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2020 and notes thereto contained in the Company’s Annual Report on Form 10-K. Certain information and note disclosures normally included in consolidated financial statements have been condensed. The December 31, 2020, balance sheet included herein was derived from the audited consolidated financial statements, but does not include all disclosures, including notes, required by GAAP for complete financial statements.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 in the Notes to the Consolidated Financial Statements for 2020 contained in the Annual Report on Form 10-K, filed with the SEC on March 31, 2021, describes the significant accounting policies that the Company used in preparing our consolidated condensed financial statements. On an ongoing basis, the Company evaluates our estimates, including, but not limited to, those related to revenue/reserves and allowances. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from these estimates under different assumptions or conditions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments primarily include cash, accounts receivable, derivative liabilities, accounts payable and debt. Due to the short-term nature of cash, accounts receivables and accounts payable, the carrying amounts of these assets and liabilities approximate their fair value. Debt approximates fair value due to either the short-term nature or recent execution of the debt agreement. The amount of consideration received is deemed to approximate the fair value of long-term debt net of any debt discount and issuance cost.
| 8 |
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
| ● | Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. | |
| ● | Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. | |
| ● | Level 3 Inputs - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The following table sets forth, by level within the fair value hierarchy, the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of September 30, 2021, and December 31, 2020 (in thousands):
| Markets for Identical Assets | Other Observable Inputs | Significant Unobservable Inputs | Carrying Value as of September 30, | |||||||||||||
| Description | (Level 1) | (Level 2) | (Level 3) | 2021 | ||||||||||||
| Derivative liabilities - warrant instruments | $ | - | $ | - | $ | $ | ||||||||||
| $ | $ | |||||||||||||||
| Markets for Identical Assets | Other Observable Inputs | Significant Unobservable Inputs | Carrying Value as of December 31, | |||||||||||||
| Description | (Level 1) | (Level 2) | (Level 3) | 2020 | ||||||||||||
| Derivative liabilities - warrant instruments | $ | $ | $ | $ | ||||||||||||
| Earn-out payable – related party | - | - | ||||||||||||||
| $ | $ | |||||||||||||||
| 9 |
The following table shows the change in the Company’s warrant instruments rollforward for the nine months ended September 30, 2021:
| Amount (in thousands) | ||||
| Balance, December 31, 2020 | $ | |||
| Exercise of warrants | ( | ) | ||
| Change in fair value of derivative liabilities | ||||
| Balance, September 30, 2021 | $ | |||
GAIN (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. For purposes of this calculation, options to purchase common stock, restricted stock units subject to vesting and warrants to purchase common stock were considered to be common stock equivalents. Diluted net income (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. For the quarter ended September 30, 2021, where the company had income, approximately million of potentially dilutive shares were excluded from the computation of diluted earnings per share due to their antidilutive effect.
REVENUE RECOGNITION
In accordance with the FASB’s Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), the Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and the title, and the significant risks and rewards of ownership of products or services are transferred to its customers. Product revenue is derived from the sale of projectors, interactive panels and related software and accessories to distributors, resellers, and end users. Service revenue is derived from hardware maintenance services, product installation, training, software maintenance, and subscription services.
Nature of Products and Services and Related Contractual Provisions
The Company’s sales of interactive devices, including panels, projectors, and other interactive devices generally include hardware maintenance services, a license to software, and the provision of related software maintenance. In most cases, interactive devices are sold with hardware maintenance services with terms of approximately 60 months. Software maintenance includes technical support, product updates on a when and if available basis, and error correction services. At times, non-interactive projectors are also sold with hardware maintenance services with terms of approximately 60 months. The Company also licenses software independently of its interactive devices, in which case it is bundled with software maintenance, and in some cases, subscription services that include access to on-line content, and cloud-based applications. The Company’s software subscription services provide access to content and software applications on an as needed basis over the Internet, but do not provide the right to take delivery of the software applications.
The Company’s product sales, including those with software and related services, generally include a single payment up front for the products and services, and revenue is recorded net of estimated sales returns and rebates based on the Company’s expectations and historical experience. For most of the Company’s product sales, control transfers, and therefore, revenue is recognized when products are shipped at the point of origin. When the Company transfers control of its products to the customer prior to the related shipping and handling activities, the Company has adopted a policy of accounting for shipping and handling activities as a fulfillment cost rather than a performance obligation. For many of the Company’s software product sales, control is transferred when shipped at the point of origin since the software is installed on the interactive hardware device in advance of shipping. For software product sales, control is transferred when the customer receives the related interactive hardware since the customer’s connection to the interactive hardware activates the software license at which time the software is made available to the customer. For the Company’s software maintenance, hardware maintenance, and subscription services, revenue is recognized ratably over time as the services are provided since time is the best output measure of how those services are transferred to the customer.
The Company’s installation, training and professional development services are generally sold separately from the Company’s products. Control of these services is transferred to our customers over time with hours/time incurred in providing the service being the best depiction of the transfer of services since the customer is receiving the benefit of the services as the work is performed.
| 10 |
For the sale of third-party products and services where the Company obtains control of the products and services before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when determining whether it obtains control of the third-party products and services including, but not limited to, evaluating if it can establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product or service. The Company has not historically entered into transactions where it does not take control of the product or service prior to transfer to the customer.
The Company excludes all taxes assessed by a governmental agency that are both imposed on and concurrent with the specific revenue-producing transaction from revenue (for example, sales and use taxes). In essence, the Company is reporting these amounts collected on behalf of the applicable government agency on a net basis as though they are acting as an agent. The taxes collected and not yet remitted to the governmental agency are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Customer Financing Arrangements
Through a third-party leasing partner, we provide financing programs that are designed to offer customers a variety of options to purchase interactive technology solutions whereby customers enter into purchase agreements with us along with a separate financing or leasing contract with a third-party lender, who advances the proceeds from the sale to us upon contract execution and shipment of goods. In such situations, the sales to the customer are final and the Company bears no risk of loss regarding subsequent payments.
Significant Judgments
For contracts with multiple performance obligations, each of which represent promises within a contract that are distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). The Company’s products and services included in its contracts with multiple performance obligations generally are not sold separately and there are no observable prices available to determine the SSP for those products and services. Since observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, when applicable, the estimated cost to provide the performance obligation, market trends in the pricing for similar offerings, product-specific business objectives, and competitor or other relevant market pricing and margins. Because observable prices are generally not available for the Company’s performance obligations that are sold in bundled arrangements, the Company does not apply the residual approach to determining SSP. However, the Company does have certain performance obligations for which pricing is highly variable or uncertain, and contracts with those performance obligations generally contain multiple performance obligations with highly variable or uncertain pricing. For these contracts the Company allocates the transaction price to those performance obligations using an alternative method of allocation that is consistent with the allocation objective and the guidance on determining SSPs in Topic 606 considering, when applicable, the estimated cost to provide the performance obligation, market pricing for competing product or service offerings, residual values based on the estimated SSP for certain goods, product-specific business objectives, incremental values for bundled transactions that include a service relative to similar transactions that exclude the service, and competitor pricing and margins. A separate price has not been established by the Company for its hardware maintenance services and software maintenance services. In addition, hardware maintenance services, software solutions, and the related maintenance services are never sold separately and are proprietary in nature, and the related selling price of these products and services is highly variable or uncertain. Therefore, the SSP of these products and services is estimated using the alternative method described above, which includes residual value techniques.
The Company has applied the portfolio approach to its allocation of the transaction price for certain portfolios of contracts that are executed in the same manner, contain the same performance obligations, and are priced in a consistent manner. The Company believes that the application of the portfolio approach produces the same result as if they were applied at the contract level.
| 11 |
Contract Balances
The timing of invoicing to customers often differs from the timing of revenue recognition and these timing differences can result in receivables, contract assets, or contract liabilities (deferred revenue) on the Company’s consolidated balance sheets. Fees for the Company’s product and most service contracts are fixed, except as adjusted for rebate programs when applicable, and are generally due within 30-60 days of contract execution. Fees for installation, training, and professional development services are fixed and generally become due as the services are performed. The Company has an established history of collecting under the terms of its contracts without providing refunds or concessions to its customers. The Company’s contractual payment terms do not vary when products are bundled with services that are provided over multiple years. In these contracts where services are expected to be transferred on an ongoing basis for several years after the related payment, the Company has determined that the contracts generally do not include a significant financing component. The upfront invoicing terms are designed 1) to provide customers with a predictable way to purchase products and services where the payment is due in the same timeframe as when the products, which constitute the predominant portion of the contractual value, are transferred, and 2) to ensure that the customer continues to use the related services; so that the customer will receive the optimal benefit from the products during the course of such product’s lifetime. Additionally, the Company has elected the practical expedient to exclude any financing component from consideration for contracts where, at contract inception, the period between the transfer of services and the timing of the related payment is not expected to exceed one year.
The
Company has an unconditional right to consideration for all products and services transferred to the customer. That unconditional right
to consideration is reflected in accounts receivable in the accompanying consolidated balance sheets in accordance with Topic 606. Contract
liabilities are reflected in deferred revenue in the accompanying consolidated balance sheets and reflect amounts allocated to performance
obligations that have not yet been transferred to the customer related to software maintenance, hardware maintenance, and subscription
services. The Company has no material contract assets on September 30, 2021, or December 31, 2020. During the nine months ended
September 30, 2021 and September 30, 2020, the Company recognized $
Variable Consideration
The Company’s otherwise fixed consideration in its customer contracts may vary when refunds or credits are provided for sales returns, stock rotation rights, price protection provisions, or in connection with certain other rebate provisions. The Company generally does not allow product returns other than under assurance warranties or hardware maintenance contracts. However, the Company, on a case-by-case basis, will grant exceptions, mostly for “buyer’s remorse” where the distributor or reseller’s end customer either did not understand what they were ordering or otherwise determined that the product did not meet their needs. An allowance for sales returns is estimated based on an analysis of historical trends. In very limited situations, a customer may return previous purchases held in inventory for a specified period of time in exchange for credits toward additional purchases. The Company includes variable consideration in its transaction price when there is a basis to reasonably estimate the amount of the fee and it is probable there will not be a significant reversal. These estimates are generally made using the expected value method based on historical experience and are measured at each reporting date. There was no material revenue recognized in the third quarter of 2021 related to changes in estimated variable consideration that existed at December 31, 2020.
Remaining Performance Obligations
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of accounting
within the contract. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as,
the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies performance
obligations at contract inception so that it can monitor and account for the obligations over the life of the contract. Remaining performance
obligations represent the portion of the transaction price in a contract allocated to products and services not yet transferred to the
customer. As of September 30, 2021 and December 31, 2020, the aggregate amount of the contractual transaction prices allocated
to remaining performance obligations was $
| 12 |
In accordance with Topic 606, the Company has elected not to disclose the value of remaining performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (for example, a time-and-materials professional services contracts). In addition, the Company has elected not to disclose the value of remaining performance obligations for contracts with performance obligations that are expected, at contract inception, to be satisfied over a period that does not exceed one year.
Disaggregated Revenue
The Company disaggregates revenue based upon the nature of its products and services and the timing and in the manner which it is transferred to the customer. Although all products are transferred to the customer at a point in time, hardware and some software is pre-installed on the interactive device are transferred at the point of shipment, while some software is transferred to the customer at the time the hardware is received by the customer or when software product keys are delivered electronically to the customer. All service revenue is transferred over time to the customer; however, professional services are generally transferred to the customer within a year from the contract date as measured based upon hours or time incurred while software maintenance, hardware maintenance, and subscription services are generally transferred over five years from the contract execution date as measured based upon the passage of time.
| Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2021 (in thousands) | September 30, 2020 (in thousands) | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Product Revenues: | ||||||||||||||||
| Hardware | $ | $ | $ | $ | ||||||||||||
| Software | ||||||||||||||||
| Service Revenues: | ||||||||||||||||
| Professional Services | ||||||||||||||||
| Maintenance and Subscription Services | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Contract Costs
The Company capitalizes incremental costs to obtain a contract with a customer if the Company expects to recover those costs. The incremental costs to obtain a contract are those that the Company incurs to obtain a contract with a customer that it would not have otherwise incurred if the contract were not obtained (e.g., a sales commission). The Company capitalizes the costs incurred to fulfill a contract only if those costs meet all the following criteria:
| ● | The costs relate directly to a contract or to an anticipated contract that the Company can specifically identify. | |
| ● | The costs generate or enhance resources of the Company that will be used in satisfying (or in continuing to satisfy) performance obligations in the future. | |
| ● | The costs are expected to be recovered. |
Certain
sales commissions incurred by the Company are determined to be incremental costs to obtain the related contracts, which are deferred
and amortized ratably over the estimated economic benefit period. For these sales commissions that are incremental costs to obtain where
the period of amortization would be recognized over a period that is one year or less, the Company has elected the practical expedient
to expense those costs as incurred. Commission costs that are deferred are classified as current or non-current assets based on the timing
of when the Company expects to recognize the expense and are included in prepaid and other assets and other assets, respectively, in
the accompanying condensed consolidated balance sheets. Total deferred commissions, net of accumulated amortization, was $
| 13 |
SUBSEQUENT EVENTS
We reviewed all material events through the date on which these consolidated condensed financial statements were issued for subsequent event disclosure consideration as described in Note 15.
ACCOUNTING STANDARDS PENDING ADOPTION
In October 2021, The FASB issued Accounting Standards Update (ASU) No. 2021-08, “Accounting for Contract Assets and Contract Liabilities From Contracts With Customers”, which amends the guidance in ASC 805 to require that “an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606.” At the acquisition date, an acquirer would account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts. The Company is currently evaluating the impact that this standard update will have on its financial statements.
In August 2021, The FASB issued Accounting Standards Update (ASU) 2021-06, “Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses” to amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses. Among other changes, the final rule modifies the significance tests and improves the disclosure requirements for (1) acquired or to be acquired businesses, (2) real estate operations, and (3) pro forma financial information. In addition, the final rule includes amendments to financial disclosures specific to smaller reporting companies (SRCs). The Company is currently evaluating the impact that this standard update will have on its financial statements.
In May 2021, the FASB issued ASU No. 2021-04, “Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.” The FASB issued this update to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this will be effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. The Company is currently evaluating the impact that this standard will have on its financial statements.
In August 2020, the FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The new guidance simplifies the accounting for certain convertible instruments and for contracts in an entity’s own equity. Key provisions include the elimination of the “cash conversion” guidance and the “beneficial conversion feature” guidance in ASC 470-20 as well as a simplification of the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification by removing certain conditions in ASC 815-40-25. Since the Company is an Emerging Growth Company, the ASU is not effective until annual reporting periods beginning after December 15, 2023. Earlier application is permitted. The Company is currently evaluating the impact that this standard will have on its financial statements, and whether it will adopt the new standard earlier than January 2024.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” (Topic 740). The new guidance modifies the requirements for the timing of adoption of enacted changes in tax law. The effects of changes on taxes currently payable or refundable for the current year must be reflected in the computation of the annual effective tax rate. Since the Company is an Emerging Growth Company, the ASU is not effective until fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments Credit Losses” (Topic 326): Measurement of Credit Losses on Financial Instruments.” The new guidance replaces the incurred loss methodology with the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including trade accounts receivable. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842. This new guidance changes the impairment model for most financial assets and certain other instruments. Since the Company is an Emerging Growth Company, the ASU is not effective until fiscal years beginning after December 15, 2022, and interim periods within that fiscal year. The Company continues to evaluate the impact that this standard will have, if any, on its financial statements.
In February 2016, the FASB issued ASC 842 “Leases” that creates new accounting and reporting guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Under the previous guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily depended on its classification as a finance or operating lease. The new guidance also requires disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. For Emerging Growth Companies, the new standard is not effective until annual reporting periods beginning after December 15, 2021, including interim periods within that reporting period. Earlier application is permitted.
| 14 |
There were various other accounting standards and interpretations issued recently, some of which although applicable, are not expected to a have a material impact on our financial position, operations, or cash flows.
NOTE 2 – RECENT BUSINESS ACQUISITION
Interactive Concepts
On
The following table summarizes the estimated acquisition date fair values of the net assets acquired and liabilities assumed, and the estimate of the fair value of consideration paid:
| (in thousands) | ||||
| Assets acquired: | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Inventories | ||||
| Property and equipment | ||||
| Total assets acquired | ||||
| Accounts payable and accrued expenses | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Total liabilities assumed | ( | ) | ||
| Net tangible assets acquired | ||||
| Identifiable intangible assets: | ||||
| Tradename | ||||
| Customer relationships | ||||
| Total intangible assets subject to amortization | ||||
| Goodwill | ||||
| Total net assets acquired | $ | |||
| Consideration paid: | ||||
| Cash | $ | |||
| Deferred cash consideration | ||||
| Common shares issued | ||||
| Total consideration paid | $ | |||
Sahara Presentation Systems PLC
On
September 24, 2020, the Company acquired
| 15 |
As
consideration for the purchase of Sahara, the Company transferred GBP
The consideration transferred to the selling shareholders along with the assets acquired and liabilities assumed were recorded at their estimated fair values at the acquisition date. The excess consideration over the net fair values of the assets acquired and liabilities assumed was recognized as goodwill.
The fair value of the deferred revenue at the date of acquisition was determined based on the estimated direct and incremental costs to fulfill the remaining performance obligations associated with the deferred revenue, plus a reasonable profit margin. Accordingly, the carrying amount of deferred revenue at the acquisition date was reduced to its estimated fair value based on the assumptions above which has resulted in and will result in a reduction in revenue that otherwise would have been recognized in periods subsequent to the acquisition date.
The following table summarizes the estimated fair values of the net assets acquired and liabilities assumed, and the estimate of the fair value of consideration paid:
| (in thousands) | ||||
| Assets acquired: | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Inventories | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment | ||||
| Total assets acquired | ||||
| Accounts payable and accrued expenses | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Other liabilities | ( | ) | ||
| Total liabilities assumed | ( | ) | ||
| Net tangible assets acquired | ||||
| Identifiable intangible assets: | ||||
| Customer relationships | ||||
| Trademarks | ||||
| Technology | ||||
| Total intangible assets subject to amortization | ||||
| Goodwill | ||||
| Total net assets acquired | $ | |||
| Consideration paid: | ||||
| Cash | $ | |||
| Preferred shares issued | ||||
| Total consideration paid | $ | |||
| 16 |
The results of operations of Sahara following the acquisition are included in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the nine months ended September 30, 2021.
Pro Forma Financial Results
The following unaudited pro forma information reflects our consolidated results of operations for the three and nine months ending September 30, 2020, as if the acquisition of Sahara had taken place on January 1, 2020. The unaudited pro forma information is not necessarily indicative of the results of operations that the Company would have reported had the acquisition actually occurred at the beginning of these periods nor is it necessarily indicative of future results. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, including, but not limited to, anticipated costs savings from synergies or other operational improvements. The nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the business combination are included in the pro forma revenue and net earnings reflected below.
| Three months ended September 30, 2020 | ||||||||
| (Unaudited) in thousands as Reported | (Unaudited) in thousands Proforma | |||||||
| Revenues, net | $ | $ | ||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Nine months ended September 30, 2020 | ||||||||
| (Unaudited) in thousands As Reported | (Unaudited) in thousands Proforma | |||||||
| Revenues, net | $ | $ | ||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | ||
NOTE 3 – ACCOUNTS RECEIVABLE - TRADE
Accounts receivable consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):
| 2021 | 2020 | |||||||
| Accounts receivable – trade | $ | $ | ||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Allowance for sales returns and volume rebates | ( | ) | ( | ) | ||||
| Accounts receivable - trade, net of allowances | $ | $ | ||||||
NOTE 4 – INVENTORIES
Inventories are stated at the lower of cost or net realizable value and include spare parts and finished goods. Inventories are primarily determined using specific identification and the first-in, first-out (“FIFO”) cost methods. Cost includes direct cost from the Current Manufacturer (“CM”) or Original Equipment Manufacturer (“OEM”), plus material overhead related to the purchase, inbound freight and import duty costs.
Inventories consisted of the following at September 30, 2021, and December 31, 2020 (in thousands):
| 2021 | 2020 | |||||||
| Finished goods | $ | $ | ||||||
| Spare parts | ||||||||
| Reserve for inventory obsolescence | ( | ) | ( | ) | ||||
| Advanced shipping costs | - | |||||||
| Inventories, net | $ | $ | ||||||
| 17 |
NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at September 30, 2021, and December 31, 2020 (in thousands):
| 2021 | 2020 | |||||||
| Prepayments to vendors | $ | $ | ||||||
| Prepaid licenses and other | ||||||||
| Unbilled revenue | - | |||||||
| Prepaid expenses and other current assets | $ | $ | ||||||
NOTE 6 – INTANGIBLE ASSETS
Intangible assets consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):
| Useful lives | 2021 | 2020 | ||||||||
| Patents | $ | $ | ||||||||
| Customer relationships | ||||||||||
| Technology | ||||||||||
| Domain | ||||||||||
| Tradenames | ||||||||||
| Intangible assets, at cost | ||||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||
| Intangible assets, net of accumulated amortization | $ | $ | ||||||||
For
the nine months ended September 30, 2021, and 2020, the Company recorded amortization expense of $
NOTE 7 – DEBT
The following is a summary of our debt as of September 30, 2021, and December 31, 2020:
| 2021 | 2020 | |||||||
| Debt – Third Parties | ||||||||
| Note payable – Lind Global | $ | $ | ||||||
| Paycheck Protection Program | ||||||||
| Accounts receivable financing – Sallyport Commercial | ||||||||
| Note payable – STEM Education Holdings | ||||||||
| Total debt | ||||||||
| Less: Discount and issuance cost | ||||||||
| Current portion of debt | ||||||||
| Long-term debt | $ | $ | ||||||
| Total debt (net of discount) | $ | $ | ||||||
| 18 |
Debt - Third Parties:
Lind Global Marco Fund and Lind Global Asset Management
On
February 4, 2020, the Company and Lind Global Macro Fund L.P. (“Lind”) entered into a securities purchase agreement pursuant
to which the Company received $
On
September 21, 2020, the Company and Lind Global Asset Management, LLC (“Lind Global”) entered into a securities purchase
agreement (the “Lind SPA”) pursuant to which the Company received $
During
the nine months ended September 30, 2021, as payment for the Lind and Lind Global convertible notes, the Company repaid combined
principal of $
Paycheck Protection Program Loan
On
May 22, 2020, the Company received loan proceeds of $
Everest Display, Inc.
On
June 22, 2020, the Company entered into an agreement with Everest Display, Inc., a Taiwan corporation (“EDI”), and EDI’s
subsidiary, AMAGIC Holographics, Inc., a California corporation (“AMAGIC”), effective June 11, 2020, pursuant to which $
On
January 26, 2021, the Company entered into an agreement with EDI and EDI’s subsidiary, AMAGIC, pursuant to which $
| 19 |
Accounts Receivable Financing – Sallyport Commercial Finance
On
September 30, 2020, the Company’s wholly owned subsidiaries, Boxlight Inc. (“Boxlight”), and EOS EDU
LLC. (“EOSEDU”) (Boxlight and EOSEDU together, the “Subsidiaries”), entered into an asset-based lending
agreement with Sallyport Commercial Finance, LLC (“Sallyport”), which agreement has a 12-month term (the “Term”).
Pursuant to the agreement, Sallyport agreed to purchase 90% of the eligible accounts receivable of the Subsidiaries during the
Term with a right of recourse back to the Subsidiaries if the receivables are not collectible. This agreement requires a minimum
monthly sales volume of $1,250,000 with a maximum facility limit of $
On
July 20, 2021, Boxlight and Sallyport amended the Accounts Receivable Agreement (the “ARC Amendment”) for purposes of increasing
the Maximum Facility Limit Amount to $
NOTE 8 – DERIVATIVE LIABILITIES
The Company determined that certain warrants to purchase common stock do not satisfy the criteria for classification as equity instruments due to the existence of certain net cash and non-fixed settlement provisions that are not within the sole control of the Company. Conversion and exercise prices may be lowered if the Company issues securities at lower prices in the future. Such warrants are measured at fair value at each reporting date, and the changes in fair value are included in determining net income (loss) for the period. In determining the fair value of the derivative liabilities, the Company used the Black-Scholes option pricing model at September 30, 2021 and December 31, 2020:
| September 30, 2021 | ||||
| Common stock issuable upon exercise of warrants | ||||
| Market value of common stock on measurement date | $ | |||
| Exercise price | $ | |||
| Risk free interest rate (1) | % | |||
| Expected life in years | ||||
| Expected volatility (2) | % | |||
| Expected dividend yields (3) | % | |||
| December 31, 2020 | ||||
| Common stock issuable upon exercise of warrants | ||||
| Market value of common stock on measurement date | $ | |||
| Exercise price | $ | |||
| Risk free interest rate (1) | % | |||
| Expected life in years | ||||
| Expected volatility (2) | % | |||
| Expected dividend yields (3) | % | |||
| (1) | ||
| (2) | ||
| (3) |
| 20 |
The following table shows the change in the Company’s derivative liabilities rollforward for the nine months ended September 30, 2021, and 2020 (in thousands):
| Amount | ||||
| Balance, December 31, 2020 | $ | |||
| Exercise of warrants | ( | ) | ||
| Change in fair value of derivative liabilities | ||||
| Balance, September 30, 2021 | $ | |||
| Amount | ||||
| Balance, December 31, 2019 | $ | |||
| Change in fair value of derivative liabilities | ||||
| Balance, September 30, 2020 | $ | |||
The change in fair value of derivative liabilities includes losses from exercise price modifications.
NOTE 9 – INCOME TAXES
Pretax (loss) income resulting from domestic and foreign operations is as follows (in thousands):
| Three Months Ended September 30 | Three Months Ended September 30, | |||||||
| 2021 | 2020 | |||||||
| United States | $ | ( | ) | $ | ( | ) | ||
| Foreign | - | |||||||
| Total pretax book income, (loss) | $ | $ | ( | ) | ||||
| Nine Months Ended September 30 | Nine Months Ended September 30, | |||||||
| 2021 | 2020 | |||||||
| United States | $ | ( | ) | $ | ( | ) | ||
| Foreign | - | |||||||
| Total pretax book loss | $ | ( | ) | $ | ( | ) | ||
The
Company recorded income tax expense of $
The Company operates in the United States, United Kingdom, and other jurisdictions. Income taxes have been provided based upon the tax laws and rates of the countries in which operations are conducted and income is earned.
Prior to the Sahara acquisition, the Company had a net deferred tax asset position in the United States, the United Kingdom, and other jurisdictions, primarily driven by net operating losses. The recoverability of these deferred tax assets depends on the Company’s ability to generate taxable income in the jurisdiction to which the loss carryforward applies. The Company also depends on specific tax provisions in each jurisdiction that could impact utilization. The Company has evaluated both positive and negative evidence as to the ability of its legacy entities in each jurisdiction to generate future taxable income. Based on its history of cumulative losses in those jurisdictions, we believe it is appropriate to maintain a full valuation allowance on the Company’s net deferred tax asset at September 30, 2021 and December 31, 2020.
| 21 |
Due to the Sahara and Interactive Concepts acquisitions, the Company has recognized a net deferred tax liability for the acquired entities, primarily driven by acquired intangible assets for which it does not have tax basis in the jurisdictions in which operates (primarily the United Kingdom, the Netherlands, and the United States). The Company does not expect to qualify for any consolidated filing positions in any of these countries, so there is no ability to net the deferred tax liabilities of the Sahara companies against the deferred tax assets of the legacy Boxlight companies.
The tax years from 2016 to 2020 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company has not identified any uncertain tax positions at this time.
During
the second quarter of 2021, the Company became aware of a potential state tax exposure for failure to file minimum tax returns in a
state for several years. The Company has tentatively agreed to the proposed tax assessment, but it is appealing the associated
interest and penalty assessment. The Company has recorded an exposure item of $
NOTE 10 – EQUITY
Preferred Shares
The
Company’s articles of incorporation provide that the Company is authorized to issue shares of preferred stock consisting
of: 1)
Issuance of preferred shares
Series A Preferred Stock
At the time of the Company’s initial public offering, the Company issued shares of the Company’s non-voting convertible Series A preferred stock to Vert Capital for the acquisition of Genesis. All of the Series A preferred stock was convertible into shares of Class A common stock. On August 5, 2019, a total of shares of Series A preferred stock were converted into a total of shares of Class A common stock.
Series B Preferred Stock and Series C Preferred Stock
As
discussed in Note 2 above, on September 25, 2020, in connection with the acquisition of Sahara, the Company issued shares of
Series B Preferred Stock and shares of Series C Preferred Stock. The Series B Preferred Stock has a stated and liquidation
value of $
To the extent not previously converted into the Company’s Class A common stock, the outstanding shares of Series B Preferred Stock shall be redeemable at the option of the holders at any time or from time to time commencing on January 1, 2024, upon thirty (30) days prior written notice to the holders, 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. The Series C Preferred Stock is also subject to redemption on the same terms commencing January 1, 2026.
| 22 |
As
disclosed in in Note 2, the aggregate estimated fair value of the Series B and C Preferred Stock of $
As the redemption features in the Series B Preferred Stock and Series C Preferred Stock are not solely within the control of the Company, the Company has classified the Series B Preferred Stock and Series C Preferred Stock as mezzanine or temporary equity in the Company’s condensed consolidated balance sheet.
On
March 24, 2021, the Company entered into a share redemption and conversion agreement with certain holders of Series B and Series C preferred
stock (the “Redemption Agreement”) which allows the Company to redeem and repurchase each such stockholder’s
shares of Series B preferred stock on or before June 30, 2021 for the stated or liquidation value of approximately £
On June 14, 2021, the Company entered into an amendment to the Redemption Agreement (the “Amended Redemption Agreement”) for purposes of extending the completion date to on or before December 31, 2021. In addition, the Amended Redemption Agreement changed the definition of “Redemption Payments” such that the redemption payment schedule would begin on or before May 31, 2021, for the quarter then ended and continue quarterly until the date of completion.
Regarding these amendments, the Company applied the accounting guidance from ASC 470-50 pertaining to determining whether an amendment to an equity-classified preferred share is an extinguishment or modification, and concluded that the Amended Redemption Agreement on June 14, 2021, as it effected the Series B Preferred Stock, resulted in an extinguishment of the original equity instruments subject to redemption agreement. Accordingly, the Series B Preferred Stock subject to the Amended Redemption Agreement was recorded at its fair value as of June 14, 2021, and a $367 thousand deemed contribution was credited to additional-paid-in-capital. With the Redemption Agreement, the Series B Preferred Stock includes a beneficial conversion feature, but in accordance with ASC 470-20, since it is dependent upon contingencies that are not solely in the control of the holder, the beneficial conversion feature was not recognized for accounting purposes.
Common Stock
The
Company’s common stock consists of 1)
Issuance of common stock
Public Offering
On
July 31, 2020, the Company issued shares of the Company’s Class A common stock at a public offering price of $ per
share. Gross proceeds from the issuances were $
On
June 11, 2020, the Company issued shares of the Company’s Class A common stock at a public offering price of $ per
share. In addition, on June 24, 2020, the Company issued an additional shares of Class A common stock to the underwriter at
$ per share. Gross proceeds from the issuances were $
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Debt Conversion
During
the nine months ended September 30, 2021, the Company repaid principal of $
Accounts Payable and Other Liabilities Conversions
During
the nine months ended September 30, 2021, the Company converted $
Compensation
During the nine months ended September 30, 2021, and in accordance with the terms of his employment agreement, Michael Pope, our Chairman and Chief Executive Officer, received shares of restricted Class A common stock, which shares remain subject to certain vesting conditions. The shares will vest in substantially equal monthly installments over a period of months.
Exercise of stock options
During the nine months ended September 30, 2021, options to purchase a total of thousand shares of Class A common stock were exercised.
The total number of underlying shares of the Company’s Class A common stock available for grant to directors, officers, key employees and consultants of the Company or a subsidiary of the Company under the Company’s 2021 Equity Incentive Plan and 2014 Equity Inventive Plan, as amended (together “Equity Incentive Plans”), in the aggregate were and shares, respectively. The 2021 Equity Incentive Plan was approved by the Company’s Board on April 12, 2021 and approved by the shareholders at the Company’s Annual Shareholders Meeting held on June 11, 2021. All grants made under the Equity Incentive Plans must be approved by the Company’s Board prior to issuance.
Stock Options
Under our stock option program, pursuant to the Equity Incentive Plans, an employee receives an award that provides the opportunity in the future to purchase the Company’s shares at the market price of our stock on the date the award is granted (the strike price). The options become exercisable over a range of immediately vested to and expire from the grant date, unless stated differently in the option agreements, if they are not exercised. Stock options have no financial statement effect on the date they are granted but rather are reflected over time through compensation expense. We record compensation expense based on the estimated fair value of the awards which is amortized as compensation expense on a straight-line basis over the vesting period. Accordingly, total expense related to the award is reduced by the fair value of options that are forfeited by employees that leave the Company prior to vesting.
| Number of Units | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | ||||||||||
| Outstanding, December 31, 2020 | $ | |||||||||||
| Granted | - | |||||||||||
| Exercised | ( | ) | - | |||||||||
| Cancelled | ( | ) | - | |||||||||
| Outstanding, September 30, 2021 | $ | |||||||||||
| Exercisable, September 30, 2021 | $ | |||||||||||
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The Company estimates the fair value of each stock option award on the date of grant using a Black-Scholes option pricing model. As of September 30, 2021, and December 31, 2020, the stock options had an intrinsic value of approximately $ million and $ million, respectively.
Restricted Stock Units
Under our Equity Incentive Plans the Company may grant restricted stock units (“RSUs”) to certain employees and non-employee directors. Upon granting the RSUs, the Company recognizes a fixed compensation expense equal to the fair market value of the underlying shares of RSUs granted on a straight-line basis over the requisite services period for the RSUs. Compensation expense related to the RSUs is reduced by the fair value of units that are forfeited by employees that leave the Company prior to vesting. The restricted stock units vest over a range of immediately vested to four-year vesting periods in accordance with the terms of the applicable RSU grant agreement.
The following is a summary of the restricted stock activities during the nine months ended September 30, 2021.
| Number of Units | Weighted Average Grant Date Fair Value | |||||||
| Outstanding, December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Outstanding, September 30, 2021 | $ | |||||||
On February 24, 2021, the Company granted an aggregate of RSUs to its board members. These RSUs vest ratably over and had an aggregated fair value of approximately $ thousand on the grant date.
In addition, on March 20, 2021, the Company granted an aggregate of shares of restricted common stock to Michael Pope, the Company’s CEO and Chairman, pursuant to his employment agreement. These shares were issued pursuant to the 2014 Equity Incentive Plan, vest ratably over , are issued monthly as they vest, and had an aggregated fair value of approximately $million on the grant date.
Warrants
The following is a summary of the warrant activities during the nine months ended September 30, 2021:
| Number of Units | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | ||||||||||
| Outstanding, December 31, 2020 | $ | |||||||||||
| Granted | - | - | ||||||||||
| Exercised | ( | ) | - | |||||||||
| Outstanding, September 30, 2021 | $ | |||||||||||
| Exercisable, September 30, 2021 | $ | |||||||||||
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Stock compensation expense
For the nine months ended September 30, 2021, and 2020, the Company recorded the following stock compensation in general and administrative expense (in thousands):
| 2021 | 2020 | |||||||
| Stock options | $ | $ | ||||||
| Restricted stock units | ||||||||
| Warrants | ||||||||
| Total stock compensation expense | $ | $ | ||||||
As of September 30, 2021, there was approximately $ million of unrecognized compensation expense related to unvested options, restricted stock units, and warrants, which will be amortized over the remaining vesting period. Of that total, approximately $ million is estimated to be recorded as compensation expense in the remaining three months of 2021.
NOTE 12 – RELATED PARTY TRANSACTIONS
Management Agreement
On
January 31, 2018, the Company entered into a management agreement (the “Management Agreement”) with an entity owned and controlled
by our Chief Executive Officer and Chairman, Michael Pope. The Management Agreement is separate and apart from Mr. Pope’s employment
agreement with the Company. Under the Management Agreement, effective as of the first day of the same month that Mr. Pope’s employment
with the Company shall terminate. Thereafter, and for a term of 13 months, Mr. Pope shall provide consulting services to the Company
including sourcing and analyzing strategic acquisitions, assisting with financing activities, and other services. As consideration for
the services provided, the Company shall pay a management fee equal to
On
June 21, 2018, the Company issued a warrant to purchase
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases six office building facilities located in Lawrenceville, Georgia; Poulsbo, Washington; Lexington, Massachusetts; Scottsdale, Arizona; Miami, Florida and Utica, New York in the U.S., and two office building facilities in Dartford and Kent in the U.K. for sales, marketing, technical support, and service staff. All such facilities are under non-cancelable lease agreements with terms ending in 2023.
For
the nine months ended September 30, 2021, and 2020, aggregate rent expense was $
Purchase Commitments
The Company is legally obligated to fulfill certain purchase commitments made to vendors that supply materials used in the Company’s products. As of September 30, 2021, the total amount of such open inventory purchase orders was $51.5 million.
NOTE 14 – CUSTOMER AND SUPPLIER CONCENTRATION
There were two customers that account for greater than 10% of the Company’s consolidated revenues for the nine months ended September 30, 2021. Details are as follows:
| Customer | Total revenues from
the customer for the nine months ended September 30, 2021 |
Accounts receivable from this customer as of September 30, 2021 (in thousands) |
||||||
| 1 | 12.8 | % | $ | 9,815 | ||||
| 2 | 10.1 | % | $ | 5,142 | ||||
For the nine months ended September 30, 2021, the Company’s purchases were concentrated amongst two vendors. Details are as follows:
| Vendor | Total
purchases total cost of sales for the nine months ended September 30, 2021 |
Accounts payable (prepayment) to the vendor as of September 30, 2021 (in thousands) |
||||||
| 1 | 47.0 | % | $ | 4,188 | ||||
| 2 | 18.4 | % | $ | (2,070 | ) | |||
The Company believes there are other suppliers that could be substituted should the above cited suppliers become unavailable or non-competitive.
NOTE 15 – SUBSEQUENT EVENTS
The Company signed an agreement on October 29, 2021 to acquire FrontRow Calypso LLC, a leader in classroom and campus communication solutions for the education market. The acquisition will be effective as of October 31, 2021, and is expected to close in the fourth quarter.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere herein. The Management’s Discussion and Analysis (“MD&A”) contains forward-looking statements that involve risks and uncertainties, such as statements of our 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 form. Our actual 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 indicate future performance. Our forward-looking statements reflect our 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.
Overview
We are a technology company that is seeking to become a world 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 our robotics and coding system, 3D printing solution and portable science lab. Our products are integrated into our software suite that provides tools for presentation creation and delivery, assessment, and collaboration.
To date, we have generated substantially all our revenue from the sale of our hardware (primarily consisting of interactive displays) 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 our plan include:
| ● | Integrating products of the acquired companies and cross training our sales reps to increase their offerings and productivity. | |
| ● | Hiring new sales representatives with significant industry experience in their respective territories. | |
| ● | Expanding our reseller partner network both in key territories and in new markets, thereby increasing our penetration and reach. |
Recent Acquisitions
On March 23, 2021, the Company acquired 100% of the outstanding shares of Interactive Concepts BV, a company incorporated and registered in Belgium and a distributor of interactive technologies (“Interactive”), for total consideration of approximately $3.3 million in cash, common stock, and deferred consideration. Interactive has been the Company’s key distributor in Belgium and Luxembourg.
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On September 24, 2020, the Company acquired Sahara Presentation Systems PLC, a leader in distributed and manufactured AV solutions (“Sahara”). Headquartered in the United Kingdom, Sahara is a leader in distributed AV products and a manufacturer of multi-award-winning touchscreens and digital signage products, including the globally renowned Clevertouch and Sedao brands. In consideration for the acquisition, the Company paid to the shareholders of Sahara a total purchase price of GBP 74.0 million (approximately USD $94.9 million) in the form of GBP 52.0 million (approximately USD $66.7 million) in cash and GBP 22.0 million (approximately USD $28.2 million) in our Series B convertible preferred stock and our Series C convertible preferred stock.
Acquisition Strategy and Challenges
Our 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. 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. | |
| ● | Improved market reach and industry visibility – increase in customer base and entry into new markets. |
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 projectors), flat panels, 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 development 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 of our products during peak seasons and new product launches.
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Gross profit and gross profit margin
Our gross profit and gross profit margin have been, and may in the future be, influenced by several factors including: product, channel, and geographical revenue mix; changes in product costs related to the release of projector models; component, contract manufacturing and supplier pricing 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 our 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.
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 income (expense), net
Other income (expense), net primarily consists of interest expense associated with our debt financing arrangements, gains (losses) on the settlements of debt and trade payable obligations exchanged for common shares, 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, United Kingdom, Mexico, Sweden, Finland, Holland, and Germany. The United Kingdom, Mexico, Sweden, Finland, Holland, and Germany have a statutory tax rate different from that in the United States. Additionally, certain of our 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, 2021 and 2020
Revenues. Total revenues for the three months ended September 30, 2021 were $61.0 million as compared to $9.5 million for the three months ended September 30, 2020, resulting in a 544% increase in revenue. Revenues primarily consist of hardware revenue, software revenue, and professional development. The increase in revenues was primarily due to the acquisitions of Sahara Presentation Systems in September 2020 and Interactive Concepts in March 2021 as well as increased demand for our solutions in the U.S. and Europe.
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Cost of Revenues. Cost of revenues for the three months ended September 30, 2021 was $ 45.2 million compared to $7.5 million for the three months ended September 30, 2020, resulting in a 507% increase. Cost of revenues consists primarily of product cost, freight expenses, customs expense, and inventory adjustments. The increase in cost of revenues was associated with the acquisitions and growth of the business as outlined above and was also due to additional increases in global freight/shipping which the company has experienced (as have many others) as a result of supply chain issues arising as a result of the COVID-19 pandemic. In the first quarter of 2021 we reported the cost increase to be approximately four times normal costs as compared to pre-pandemic levels. We expect such cost increases to continue throughout 2021.
Gross Profit. Gross profit for the three months ended September 30, 2021, was $15.8 million, as compared to $2.0 million for the three months ended September 30, 2020. Gross profit margin increased from 21% to 26% despite the effects of increased freight and shipping expenses discussed above, product cost increases (which have been partially offset by increased sales prices) and certain purchase accounting adjustments stemming from the Sahara acquisition and effecting recognized revenues.
General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2021 were $11.9 million and 20% of revenues, as compared to $3.3 million and 35% of revenues for the three months ended September 30, 2020. The increase was mainly a result of the additional personnel costs associated with the acquired Sahara operations, new hires for planned growth and stock compensation issuances.
Research and Development Expenses. Research and development expenses were $355 thousand and 0.6% of revenues for the three months ended September 30, 2021, as compared to $471 thousand and 5% of revenues for the three months ended September 30, 2020. Research and development expense primarily consists of costs associated with development of our proprietary hardware and software technologies.
Other Expense (net). Other expense (net) for the three months ended September 30, 2021 was $1.4 million, as compared to $2.5 million for the three months ended September 30, 2020. Other expense decreased primarily due to $1.1 million less in losses recognized upon the settlement of certain debt obligations in exchange for issuance of common shares, offset by a $339 thousand increase in interest expense associated with increased borrowings.
Income Tax Expense. Income tax expense for the three months ending September 30, 2021 was $1.4 million, as compared no income tax expenses for the three months ended September 30, 2020. Income tax have been recognized in connection with our acquired Sahara operations.
Net Income (Loss). Net income was $729 thousand in the three months ended September 30, 2021 and net loss was $4.2 million for the three months ended September 30, 2020, respectively. The Company had net income in the quarter, a result of achieving positive operating income and operating margin in the quarter.
For the nine-month periods ended September 30, 2021 and 2020
Revenues. Total revenues for the nine months ended September 30, 2021 were $141.2 million as compared to $23.0 million for the nine months ended September 30, 2020, resulting in a 514% increase in revenue. The increase in revenues was primarily due to the acquisitions of Sahara Presentation Systems in September 2020 and Interactive Concepts in March 2021, and increased demand for our solutions in the U.S., Europe, and Australia. Organic revenue growth for the nine months of 2021 was 125%.
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Cost of Revenues. Cost of revenues for the nine months ended September 30, 2021, were $104.0 million as compared to $16.7 million for the nine months ended September 30, 2020, resulting in an 522% increase. The increase in cost of revenues was associated with the acquisitions and growth of the business as outlined above and was also due to additional increases in global freight/shipping which the company has experienced as have many others as following the COVID-10 pandemic. In the first quarter of 2021 we reported the cost increase to be approximately four times higher as compared to pre-pandemic levels, this is expected to continue throughout 2021.
Gross Profit. Gross profit for the nine months ended September 30, 2021 was $37.2 million as compared to $6.3 million for the nine months ended September 30, 2020. The gross profit margin decreased from 27% for the nine months ended September 30, 2020 to 26% in for the nine months ending September 30, 2021, primarily driven by the effects of customs and freight expenses discussed above, and certain purchase accounting adjustments stemming from the Sahara acquisition and effecting recognized revenues.
General and Administrative Expenses. General and administrative (“G&A”) expenses for the nine months ended September 30, 2021 were $32.8 million and 23% of revenue as compared to $10.4 million and 45% of revenue for the nine months ended September 30, 2020. The increase in G&A expenses resulted from additional personnel costs associated with the acquired Sahara operations, new hires for planned growth and stock compensation issuances.
Research and Development Expenses. Research and development expenses were $1.3 million and 0.9% of revenue for the nine months ended September 30, 2021, as compared to $1.1 million and 5% of revenue for the nine months ended September 30, 2020. The absolute increase in research and development expense was primarily driven by an increase in contract services related to software development.
Other Income (Expense) Net. Other expense, net, for the nine months ended September 30, 2021 was $5.8 million as compared to other expense, net, of $2.4 million for the nine months ended September 30, 2020. Other expense increased primarily due to a $1.0 million increase in interest expense associated with increased borrowings, and net movement year on year of $2.4 million of additional losses recognized upon the settlement of certain debt obligations in exchange for issuance of common shares.
Income Tax Expense. Income tax expense for the nine months ending September 30, 2021 was $3.9 million, as compared no income tax expenses for the nine months ended September 30, 2020. Income tax was recognized in connection with our acquired Sahara operations. The Company recorded a significant tax impact of $2.2 million during the second quarter of 2021 to reflect a discrete event directly pertaining to the tax impact on our UK deferred tax liability associated with the intangible assets acquired as part of the Sahara business combination, and the effect of a recent UK rate income tax rate change. Finance Bill 2021 (“the Bill”) provides for an increase in the UK statutory tax rate to 25% for taxpayers with profits over £250K beginning April 1, 2023. We expect this rate to apply to the earnings of our Sahara operations in the UK. The Bill received Royal Assent on June 10, 2021 and it is considered enacted on that date under U.S. GAAP. As such, we reflected the tax impact as a discrete event in our second quarter results. The effective tax rate is (139.3)% due to there being no tax expense/benefit for the legacy Boxlight entities, but the Sahara entities are fully taxable.
Net Loss. Net loss was $6.6 million and $7.6 million for the nine months ended September 30, 2021 and 2020, respectively. The slight decrease in the net loss was primarily due to the slightly lower gross profit margins, increased interest expense, increased tax expense, amortization of intangible assets following the Sahara acquisition, stock compensation expense, and losses incurred on the settlement of certain debt obligations in exchange for shares of our common stock.
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 consolidated condensed financial statements, which are prepared in accordance with GAAP with EBITDA and Adjusted EBITDA, with both non-GAAP financial measures of earnings.
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EBITDA represents net income (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 derivative liabilities, purchase accounting impact of fair valuing inventory and deferred revenue, and non-cash losses associated with debt settlement. Our management uses EBITDA and Adjusted EBITDA as financial measures to evaluate the profitability and efficiency of our 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 our non-GAAP financial measures in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP.
The following tables contains reconciliations of net losses to EBITDA for the periods presented.
Reconciliation of net loss for the three months ended
September 30, 2021 and 2020 to EBITDA and adjusted EBITDA
| (in thousands) | September 30, 2021 | September 30, 2020 | ||||||
| Net income | $ | 729 | $ | (4,211 | ) | |||
| Depreciation and amortization | 1,697 | 318 | ||||||
| Interest expense | 870 | 531 | ||||||
| Income tax expense | 1,391 | - | ||||||
| EBITDA | $ | 4,687 | $ | (3,362 | ) | |||
| Stock compensation expense | 1,161 | 346 | ||||||
| Change in fair value of derivative liabilities | (60 | ) | 194 | |||||
| Purchase accounting impact of fair valuing inventory | 15 | 217 | ||||||
| Purchase accounting impact of fair valuing deferred revenue | 715 | - | ||||||
| Net loss on settlement of Lind debt in stock | 638 | 1,748 | ||||||
| Adjusted EBITDA | $ | 7,156 | $ | (857 | ) | |||
Reconciliation of net loss for the nine months ended
September 30, 2021 and 2020 to EBITDA and adjusted EBITDA
| (in thousands) | September 30, 2021 | September 30, 2020 | ||||||
| Net loss | $ | (6,660 | ) | $ | (7,587 | ) | ||
| Depreciation and amortization | 5,264 | 758 | ||||||
| Interest expense | 2,652 | 1,618 | ||||||
| Income tax expense | 3,936 | - | ||||||
| EBITDA | $ | 5,192 | $ | (5,211 | ) | |||
| Stock compensation expense | 3,020 | 866 | ||||||
| Change in fair value of derivative liabilities | 164 | 239 | ||||||
| Purchase accounting impact of fair valuing inventory | 45 | 236 | ||||||
| Purchase accounting impact of fair valuing deferred revenue | 2,312 | - | ||||||
| Net loss on settlement of Lind debt in stock | 3,373 | 2,340 | ||||||
| Adjusted EBITDA | $ | 14,106 | $ | (1,530 | ) | |||
Discussion of Effect of Seasonality on Financial Condition
Certain accounts on 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 the upcoming school year, we generally build up inventories during the second quarter of the year. Therefore, inventories tend to be at the 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 and we do not need the same inventory levels during the first quarter. Accounts receivable balances tend to be at the highest levels in the third quarter, in which we record the highest level of sales.
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Due to some continuing travel restrictions and concerns for the safety for our employees during the ongoing COVID-19 pandemic, we have reduced face-to-face meetings with customers and attendance at tradeshow events. We have assessed the impact that these changes will have on our peak season sales and have concluded that funding priority will be given to initiatives that provide for continuity of learning which may result in lower priority on total learning solution sales including hardware, software, and teacher training.
Liquidity and Capital Resources
As of September 30, 2021, we had cash and cash equivalents of $6.2 million, a working capital balance of $32.0 million, and a current ratio of 1.48. This financial position represents a significant improvement from a year ago at September 30, 2020 when we had $9.6 million of cash and cash equivalents, a working capital balance of $25.1 million, and a current ratio of 1.80.
For the nine months ended September 30, 2021 and 2020, we had net cash used in operating activities of $13.1 million and $7.0 million, respectively, net cash used for investing activities of $943 thousand and $45.0 million respectively, and net cash provided by financing activities of $7.2 million and $60.7 million, respectively. We had accounts receivable net of allowances of $47.9 million and $20.9 million as of September 30, 2021, and year ended December 31, 2020, respectively.
In addition to the cash flows generated by our ongoing operating activities we financed our operations during 2021 with a new $20.0 million tranche of debt funded by our primary lender, and from a pre-existing accounts receivable financing arrangement with another lender who purchases 85% of the eligible accounts receivable of the Company, for up to $15.0 million, with the right of recourse. Our accounts receivable and our ability to borrow against accounts receivable provides us with an additional source of liquidity as cash payments are collected from customers in the normal course of business. Our accounts receivable balance fluctuates throughout the year based on the seasonality of our business.
In the current lingering COVID-19 pandemic environment, the availability of debt and equity capital has been reduced and the cost of capital has increased. Increasing our capital through equity issuance at this time could cause significant dilution to our existing stockholders. However, we are confident that the Company will be able to manage through the current challenges in the equity and debt finance markets by managing payment terms with customers and vendors.
Our cash requirements consist primarily of day-to-day operating expenses, capital expenditures and contractual obligations with respect to facility leases. We lease all 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 for the majority of our inventory purchases, which further constrains our cash liquidity.
Recent Financing
As disclosed below, the Company entered into an accounts receivable agreement, effective September 30, 2020 (the “Accounts Receivable Agreement”), between Sallyport Commercial Finance LLC (“Sallyport”) and the Company’s subsidiaries, Boxlight, Inc. and EOSEDU LLC (the Subsidiaries”). Under the terms of the Accounts Receivable Agreement, the Subsidiaries were originally able to sell up to $6,000,000 (the “Maximum Facility Limit Amount”) of eligible accounts receivable that are accepted by Sallyport for up to 90% of the face amount of each such eligible account. On July 20, 2021, Boxlight and Sallyport amended the Accounts Receivable Agreement (the “ARC Amendment”) for purposes of increasing the Maximum Facility Limit Amount to $13,000,000, as well as increasing the minimum monthly sales from $1,250,000 to $3,000,000. In exchange for entry into the ARC Amendment, Boxlight agreed to a fee of $50,000, representing one percent of the increased Maximum Facility Limit Amount. Other terms of the Accounts Receivable Agreement remained unchanged. On August 6, 2021, Boxlight and Sallyport entered into an additional amendment of the Accounts Receivable Agreement (the “Second ARC Amendment”), which further increased the Maximum Facility Limit Amount to $15,000,000. In exchange for entry into the Second ARC Amendment, Boxlight agreed to a fee of $20,000, representing one percent of the increased Maximum Facility Limit Amount. Other terms of the Accounts Receivable Agreement remained unchanged. On August 23, 2021, the Company and Sallyport, as first lien creditor, and Lind Global Macro Fund, LP (“LGMF”) and Lind Global Asset Management, LLC (“Lind Global”), together as second lien creditors, entered into the fourth amended and restated intercreditor agreement (the “Fourth A&R Intercreditor Agreement”) for the sole purpose of increasing the permitted first lien cap thereunder from $6 million to $20 million.
On January 26, 2021, we entered into an agreement with Everest Display Inc., a Taiwan corporation (“EDI”), and EDI’s subsidiary, AMAGIC Holographics Inc., a California corporation (“AMAGIC”), pursuant to which $1,983,436 in accounts payable owed by us to EDI was settled in exchange for our issuance of 793,375 shares (the “2021 Shares”) of its Class A common stock to AMAGIC at a $2.50 per share purchase price. The 2021 Shares were issued to AMAGIC pursuant to an exemption from registration provided by Rule 506 of Regulation D under Section 4(a)(2) of the Securities Act.
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On September 21, 2020, we and Lind Global entered into a securities purchase agreement (the “Lind Global SPA”), pursuant to which Lind Global purchased from the Company a $22,000,000 secured convertible note (the “Convertible Note”) in exchange for payment to us of $20,000,000 (the “Funding”). Under the terms of the Lind Global SPA, in addition to the issuance of the Convertible Note, the Company paid to Lind (i) a commitment fee of $400,000 and (ii) a bonus fee (the “Bonus Payment”) of $500,000 payable in shares of Class A common stock of the Company, with the per share price of the Bonus Payment shares calculated based on the 20-day VWAP of the Class A Common Stock prior to closing. The Convertible Note has a term of 24-months, bears a 4% interest rate (0% interest so long as the Class A Common Stock trades at $3.50 or more per share), is repayable in 22 equal instalments commencing 60 days after the Funding and, at the option of the Company, may be repaid in either cash or Class A common stock. Class A common stock issuable to Lind Global in conjunction with the Bonus Payment and the Convertible Note was registered pursuant to a shelf takedown on the Company’s existing shelf registration statement on Form S-3 (SEC File No. 333-239939).
In conjunction with our entry into the Lind Global SPA and the issuance of the Convertible Note, on September 21, 2020, the Company and Lind Global Macro Fund, LP, an affiliate of Lind Global, entered into a third amended and restated security agreement (the “Third A&R Security Agreement”) for purposes of amending and restating a prior security agreement, dated as of February 4, 2020, between the Company and Lind in order to incorporate the Lind Global SPA and the Convertible Note therein. In addition, on September 21, 2020, the Company, Sallyport Commercial Finance, LLC (“Sallyport”), as first lien creditor, and Lind and Lind Global, as second lien creditors, entered into a third amended and restated intercreditor agreement (the “Third A&R Intercreditor Agreement”) for purposes of amending and restating the second amended and restated intercreditor agreement, dated as of February 4, 2020, between the Company, Sallyport and Lind, in order to (i) incorporate Lind Global as a second lien creditor and (ii) reaffirm and confirm the relative priority of each creditor’s respective security interests in the Company’s assets, among other matters.
On July 28, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group, LLC, a Delaware limited liability company (“Maxim”), pursuant to which Maxim, as representative of the underwriters, agreed to underwrite the public offering (the “Offering”) of up to 15,000,00 shares of the Company’s Class A common stock, at a public offering price of $2.00 per share, in addition to an overallotment option (the “Overallotment Option”) of 2,250,000 shares of Common Stock. The Offering closed on July 31, 2020, with the sale of all 17,250,000 shares of the Company’s Common Stock, including the Overallotment Option, for gross proceeds of $34,500,000. Maxim acted as sole book-running manager, National Securities Corporation acted as a co-manager for the Offering, and A.G.P./Alliance Global Partners (“A.G.P.”) acted as financial advisor. As compensation for underwriting the Offering, the underwriters received an underwriting discount of 7%, equaling approximately $2,415,000, in addition to $60,000 in expenses. A.G.P.’s compensation was paid out of the underwriting discount. The Offering was made pursuant to the Company’s effective shelf registration statement on Form S-3 (SEC File No. 333-239939) (the “Registration Statement”) and the related base prospectus included therein, as supplemented by the prospectus supplement dated July 28, 2020 (the “Preliminary Prospectus”) and the final prospectus supplement, filed July 29, 2020 (the “Final Prospectus” and collectively with the Preliminary Prospectus, the “Prospectus”).
On September 8, 2020, the Company entered into an underwriting agreement (the “September Underwriting Agreement”) with Maxim pursuant to which Maxim agreed to underwrite the public offering (the “September Offering”) of 13,333,333 shares (the “Shares”) of the Company’s Class A common stock at a public offering price of $0.75 per share. The September Offering closed on September 11, 2020, and the Company sold the Shares for gross proceeds of $10,000,000. In addition, the Company granted the underwriters a 45-day option to purchase up to an additional 2,000,000 shares of Class A common stock at the public offering price less discounts and commissions (the “September Over-Allotment Option”). The September Over-Allotment Option was exercised in full on September 24, 2020, for additional proceeds of $1,500,000, through the sale of an additional 1,999,667 shares of Class A common stock. Maxim acted as sole-bookrunner and National acted as co-manager for the September Offering. Gross proceeds, before underwriting discounts and commissions and estimated offering expenses, totaled $11.5 million. As compensation for underwriting the Offering, Maxim and National together received an underwriting discount of 7% of the Offering and the Over-Allotment Option and were reimbursed for up to $85,000 in underwriting expenses. The September Offering was conducted pursuant to the Company’s registration statement on Form S-1 (SEC File No. 333-238634) previously filed with and declared effective by the SEC.
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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 consolidated condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States (“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 the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated condensed 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 consolidated condensed financial statements. 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. | Business acquisitions | |
| 3. | Goodwill and Intangible assets | |
| 4. | Stock-based compensation expense |
Emerging Growth Company
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of certain specified reduced reporting and other regulatory requirements that are available to public companies that are emerging growth companies.
These provisions include:
| (1) | an exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002; |
| (2) | an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies; |
| (3) | an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about our audit and our financial statements; and |
| (4) | reduced disclosure about our executive compensation arrangements. |
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We have elected to take advantage of the exemption from the adoption of new or revised financial accounting standards until they would apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
Under Section 2(a)(19) of the Securities Act of 1933 and Section 3(a)(80) of the Securities Exchange Act of 1934, as amended, an emerging growth company will lose its status upon the earliest of several conditions, one of which is reaching the last day of the fiscal year in which the fifth anniversary of the company’s first sale of equity securities pursuant to an effective registration statement occurs. For the Company, this will occur on January 1, 2022.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As a “smaller reporting company,” this item is not required.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this report (“Evaluation Date”), pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective due to material weaknesses described in our 2020 Annual Report on Form 10-K.
Notwithstanding the existence of these material weaknesses, we believe that the consolidated condensed financial statements included in this interim report on Form 10-Q fairly present in accordance with U.S. GAAP, in all material respects, our financial condition, results of operations and cash flows for the periods presented in this report.
Limitations on Effectiveness of Controls.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving its objectives.
(b) Changes in internal controls over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the nine-month period ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
The Company has experienced challenges within the global supply chain which has impacted the business in three key areas: (i) movement and/or delay in production schedules due to component shortages, (ii) continued delays to global shipping and receipt of goods and (iii) increased shipping costs which has reduced gross profit margin. In addition, there is presently a global silicon chip supply shortage that could potentially cause disruptions in our supply chain. While the Company’s business has not yet been affected by such disruption, in the event any of our suppliers experience such supply chain disruption, there is potential that such disruption could ultimately affect our ability to timely obtain and deliver finished goods and products.
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For additional risk factors pertinent our business please refer to the Part I Item 1A of the Company’s 2020 Annual Report on Form 10-K, which is incorporated by reference herein.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
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Item 6. Exhibits
The following exhibits are filed or furnished with this report:
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BOXLIGHT CORPORATION | ||
| November 10, 2021 | By: | /s/ Michael Pope |
| Michael Pope | ||
| Chief Executive Officer | ||
| November 10, 2021 | By: | /s/ Patrick Foley |
| Patrick Foley | ||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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