UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| [X] | Quarterly Report UNDER Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2018March 31, 2019
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 001-37564
BOXLIGHT CORPORATION
(Exact name of registrant as specified in its charter)
| Nevada | 8211 | 46-4116523 | ||
| (State or | (Primary Standard Industrial | (I.R.S. Employer | ||
| incorporation or organization) | Classification Code Number) | Identification Number) |
1045 Progress Circle
Lawrenceville, Georgia 30043
Phone: (678) 367-0809
(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: | Title of each class Name of each exchange on which registered | Trading Symbol | ||
| Common Stock, $0.0001 par value | NASDAQ Capital Market | BOXL |
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. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, 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). Yes [X] No [ ]
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 | [ ] |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] |
| Emerging growth company | [X] |
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 [ ] No [X]
The number of shares outstanding of the registrant’s common stock on August 10, 2018May 14, 2019 was 10,057,056.10,588,118.
BOXLIGHT CORPORATION
TABLE OF CONTENTS
Consolidated Condensed Balance Sheets
As of June 30, 2018,March 31, 2019, and December 31, 20172018
(Unaudited)
| March 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current asset: | ||||||||
| Cash and cash equivalents | $ | 2,717,623 | $ | 901,459 | ||||
| Accounts receivable – trade, net of allowances | 2,269,730 | 3,634,726 | ||||||
| Inventories, net of reserve | 3,520,022 | 4,214,316 | ||||||
| Prepaid expenses and other current assets | 942,023 | 1,214,157 | ||||||
| Total current assets | 9,449,398 | 9,964,658 | ||||||
| Property and equipment, net of accumulated depreciation | 216,031 | 226,409 | ||||||
| Intangible assets, net of accumulated amortization | 6,292,406 | 6,352,273 | ||||||
| Goodwill | 4,723,549 | 4,723,549 | ||||||
| Other assets | 302 | 298 | ||||||
| Total assets | $ | 20,681,686 | $ | 21,267,187 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 2,520,991 | $ | 1,883,626 | ||||
| Accounts payable and accrued expenses – related parties | 5,966,673 | 6,009,112 | ||||||
| Warranty reserve | 565,684 | 580,236 | ||||||
| Short-term debt | 1,602,185 | 2,306,227 | ||||||
| Short-term debt – related party | 446,231 | 377,333 | ||||||
| Current portion of earn-out payable – related party | 300,923 | 136,667 | ||||||
| Deferred revenues – short-term | 440,092 | 938,050 | ||||||
| Derivative liabilities | 2,531,532 | 326,452 | ||||||
| Other short-term liabilities | 19,319 | 5,128 | ||||||
| Total current liabilities | 14,393,630 | 12,562,831 | ||||||
| Deferred revenues – long-term | 105,416 | 134,964 | ||||||
| Earn-out payable – related party | 109,077 | 273,333 | ||||||
| Long-term debt – related party | 273,333 | 328,000 | ||||||
| Long-term debt | 1,344,446 | - | ||||||
| Total liabilities | 16,225,902 | 13,299,128 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.0001 par value, 50,000,000 shares authorized; 250,000 shares issued and outstanding | 25 | 25 | ||||||
| Common stock, $0.0001 par value, 200,000,000 shares authorized; 10,588,118 and 10,176,433 Class A shares issued and outstanding, respectively | 1,059 | 1,018 | ||||||
| Additional paid-in capital | 28,492,785 | 27,279,931 | ||||||
| Subscriptions receivable | (225 | ) | (225 | ) | ||||
| Accumulated deficit | (23,893,294 | ) | (19,206,271 | ) | ||||
| Other comprehensive loss | (144,566 | ) | (106,419 | ) | ||||
| Total stockholders’ equity | $ | 4,455,784 | $ | 7,968,059 | ||||
| Total liabilities and stockholders’ equity | $ | 20,681,686 | $ | 21,267,187 | ||||
See accompanying Notes to Consolidated Condensed Financial Statements.
Consolidated Condensed Statements of Operations and Comprehensive Loss
for the Three Months Ended March 31, 2019 and 2018
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | $ | 5,012,713 | $ | 5,996,685 | ||||
| Cost of revenues | 3,428,173 | 4,515,713 | ||||||
| Gross profit | 1,584,540 | 1,480,972 | ||||||
| Operating expense | ||||||||
| General and administrative expenses | 3,760,112 | 3,194,013 | ||||||
| Research and development | 235,996 | 92,505 | ||||||
| Total operating expense | 3,996,108 | 3,286,518 | ||||||
| Loss from operations | (2,411,568 | ) | (1,805,546 | ) | ||||
| Other income (expense) | ||||||||
| Interest (expense), net | (280,603 | ) | (146,928 | ) | ||||
| Other income (expense), net | 21,209 | (13,461 | ) | |||||
| Gain on settlements of liabilities | 146,434 | 25,738 | ||||||
| Change in fair value of derivative liabilities | (2,162,495 | ) | 1,035,159 | |||||
| Total other (expense) income | (2,275,455 | ) | 900,508 | |||||
| Net loss | $ | (4,687,023 | ) | $ | (905,038 | ) | ||
| Comprehensive loss: | ||||||||
| Net loss | (4,687,023 | ) | (905,038 | ) | ||||
| Other comprehensive loss | ||||||||
| Foreign currency translation (loss) gain | (38,147 | ) | 4,863 | |||||
| Total comprehensive loss | (4,725,170 | ) | (900,175 | ) | ||||
| Net loss per common share - basic and diluted | $ | (0.46 | ) | $ | (0.09 | ) | ||
| Weighted average number of common shares outstanding - basic and diluted | 10,255,808 | 9,617,234 | ||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
Consolidated Condensed Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
| June 30, 2018 | December 31, 2017 (As Restated) | |||||||
| ASSETS | ||||||||
| Current asset: | ||||||||
| Cash and cash equivalents | $ | 1,799,024 | $ | 2,010,325 | ||||
| Accounts receivable – trade, net of allowances | 5,019,988 | 3,089,932 | ||||||
| Inventories, net of reserve | 3,487,210 | 4,626,569 | ||||||
| Prepaid expenses and other current assets | 1,978,291 | 388,006 | ||||||
| Total current assets | 12,284,513 | 10,114,832 | ||||||
| Property and equipment, net of accumulated depreciation | 323,777 | 29,752 | ||||||
| Intangible assets, net of accumulated amortization | 6,850,135 | 6,126,558 | ||||||
| Goodwill | 4,404,658 | 4,181,991 | ||||||
| Other assets | 295 | 292 | ||||||
| Total assets | $ | 23,863,378 | $ | 20,453,425 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 3,057,354 | $ | 2,502,962 | ||||
| Accounts payable and accrued expenses – related parties | 5,110,792 | 4,391,713 | ||||||
| Warranty reserve | 627,177 | 491,956 | ||||||
| Short-term debt | 1,581,754 | 752,449 | ||||||
| Short-term debt– related party | 163,333 | 54,000 | ||||||
| Current portion of earn-out payable - related party | 136,667 | - | ||||||
| Convertible notes payable – related party | 50,000 | 50,000 | ||||||
| Deferred revenues – short-term | 1,726,717 | 1,127,423 | ||||||
| Derivative liabilities | 1,891,704 | 1,857,252 | ||||||
| Total current liabilities | 14,345,498 | 11,227,755 | ||||||
| Long-term debt - related party | 546,667 | - | ||||||
| Earn-out payable - related party | 273,333 | - | ||||||
| Deferred revenues – long-term | 167,573 | 175,294 | ||||||
| Total liabilities | 15,333,071 | 11,403,049 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.0001 par value, 50,000,000 shares authorized; 250,000 shares issued and outstanding | 25 | 25 | ||||||
| Common stock, $0.0001 par value, 200,000,000 shares authorized; 10,056,094and 9,558,997 Class A shares issued and outstanding, respectively | 1,006 | 956 | ||||||
| Additional paid-in capital | 25,993,583 | 21,125,956 | ||||||
| Subscriptions receivable | (325 | ) | (325 | ) | ||||
| Accumulated deficit | (17,390,448 | ) | (12,028,388 | ) | ||||
| Other comprehensive loss | (73,534 | ) | (47,848 | ) | ||||
| Total stockholders’ equity | 8,530,307 | 9,050,376 | ||||||
| Total liabilities and stockholders’ equity | $ | 23,863,378 | $ | 20,453,425 | ||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2019 | 2018 | |||||||
| Total stockholders’ equity, beginning balances | $ | 7,968,059 | $ | 9,050,376 | ||||
| Series A preferred stock | 25 | 25 | ||||||
| Class A common stock and additional paid-in capital: | ||||||||
| Beginning balances | 27,280,949 | 21,126,912 | ||||||
| Shares issued for: | ||||||||
| Cash | - | 420,000 | ||||||
| Stock options exercised | - | 3 | ||||||
| Conversion of notes payable | 382,525 | - | ||||||
| Acquisition | 500,000 | - | ||||||
| Other share-based payments | 12,000 | - | ||||||
| Closing fees for issuance of notes payable | 199,509 | - | ||||||
| Stock compensation expense | 118,861 | 496,688 | ||||||
| Other | - | (1,487 | ) | |||||
| Ending balances | 28,493,844 | 22,042,116 | ||||||
| Subscription receivable | (225 | ) | (325 | ) | ||||
| Other comprehensive loss | ||||||||
| Beginning balances | (106,419 | ) | (47,848 | ) | ||||
| Foreign currency translation loss | (38,147 | ) | 4,863 | |||||
| Ending balances | (144,566 | ) | (42,985 | ) | ||||
| Accumulated deficit | ||||||||
| Beginning balances | (19,206,271 | ) | (12,028,388 | ) | ||||
| Net loss | (4,687,023 | ) | (905,038 | ) | ||||
| Ending balances | (23,893,294 | ) | (12,933,426 | ) | ||||
| Total stockholders’ equity, ending balances | $ | 4,455,784 | $ | 9,065,405 | ||||
See accompanying notesNotes to the financial statements.Consolidated Condensed Financial Statements.
| F-3 |
Consolidated Condensed Statements of Cash Flows
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
Three Months Ended | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (4,687,023 | ) | $ | (905,038 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Amortization of debt discount | 4,839 | - | ||||||
| Bad debt expense | (116,007 | ) | 49,432 | |||||
| Gain on settlements of liabilities | (146,434 | ) | (25,738 | ) | ||||
| Change in allowance for sales returns and volume rebates | (377,232 | ) | (34,828 | ) | ||||
| Change in inventory reserve | 35,168 | (54,267 | ) | |||||
| Change in fair value of derivative liability | 2,162,495 | (1,035,159 | ) | |||||
| Stock compensation expense | 161,446 | 520,914 | ||||||
| Other share-based payments | 12,000 | - | ||||||
| Depreciation and amortization | 246,147 | 187,847 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable – trade | 1,864,532 | (8,240 | ) | |||||
| Inventories | 962,894 | 942,113 | ||||||
| Prepaid expenses and other current assets | 356,544 | (838,031 | ) | |||||
| Accounts payable and accrued expenses | 641,129 | (553,436 | ) | |||||
| Accounts payable and accrued expenses - related parties | (42,439 | ) | 347,858 | |||||
| Deferred revenues | (527,506 | ) | (643,559 | ) | ||||
| Other short-term liabilities | 14,191 | - | ||||||
| Net cash provided by (used in) operating activities | 564,744 | (2,050,132 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Cash receipts from acquisitions | 10,261 | - | ||||||
| Net cash provided by investing activities | 10,261 | - | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from short-term debt | 4,806,787 | 4,714,094 | ||||||
| Principal payments on short-term debt | (5,361,951 | ) | (4,646,582 | ) | ||||
| Proceeds from convertible notes payable | 2,200,000 | - | ||||||
| Debt issuance costs | (165,530 | ) | - | |||||
| Discount on notes payable | (200,000 | ) | - | |||||
| Proceeds from issuance of common stock | - | 420,000 | ||||||
| Proceeds from issuance of common stock upon exercise of options | - | 3 | ||||||
| Net cash provided by financing activities | 1,279,306 | 487,515 | ||||||
| Effect of foreign currency exchange rates | (38,147 | ) | 637 | |||||
| Net increase (decrease) in cash and cash equivalents | 1,816,164 | (1,561,980 | ) | |||||
| Cash and cash equivalents, beginning of the period | 901,459 | 2,010,325 | ||||||
| Cash and cash equivalents, end of the period | $ | 2,717,623 | $ | 448,345 | ||||
| Supplemental cash flow disclosures: | ||||||||
| Cash paid for interest | $ | 275,676 | $ | 144,364 | ||||
| Non-cash investment and financing transactions: | ||||||||
| Conversion of notes payable | $ | 382,525 | - | |||||
| Shares and notes payable issued as consideration for acquisition of Modern Robotics, Inc net of cash received | $ | 559,739 | - | |||||
| Shares issued for closing fees related to outstanding notes payable | $ | 199,509 | ||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
| F-4 |
Boxlight Corporation
Consolidated Condensed Statements of Operations and Comprehensive Loss
For the Three and Six Months Ended June 30, 2018 and 2017
(Unaudited)
Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 | |||||||||||||
| Revenues, net | $ | 9,663,657 | $ | 5,984,440 | $ | 15,660,342 | $ | 10,178,869 | ||||||||
| Cost of revenues | 7,938,340 | 4,273,396 | 12,454,053 | 7,268,079 | ||||||||||||
| Gross profit | 1,725,317 | 1,711,044 | 3,206,289 | 2,910,790 | ||||||||||||
| Operating expense: | ||||||||||||||||
| General and administrative expenses | 3,726,585 | 2,302,981 | 6,920,598 | 4,754,187 | ||||||||||||
| Research and development | 177,098 | 107,107 | 269,603 | 297,552 | ||||||||||||
| Total operating expense | 3,903,683 | 2,410,088 | 7,190,201 | 5,051,739 | ||||||||||||
| Loss from operations | (2,178,366 | ) | (699,044 | ) | (3,983,912 | ) | (2,140,949 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | (207,271 | ) | (106,607 | ) | (354,199 | ) | (275,698 | ) | ||||||||
| Other income (expense), net | 16,732 | (8,482 | ) | 3,271 | 41,164 | |||||||||||
| Changes in fair value of derivative liabilities | (2,191,677 | ) | - | (1,156,518 | ) | - | ||||||||||
| Gain from settlements of liabilities | 103,560 | - | 129,298 | - | ||||||||||||
| Total other income (expense) | (2,278,656 | ) | (115,089 | ) | (1,378,148 | ) | (234,534 | ) | ||||||||
| Net loss | $ | (4,457,022 | ) | $ | (814,133 | ) | $ | (5,362,060 | ) | $ | (2,375,483 | ) | ||||
| Comprehensive loss: | ||||||||||||||||
| Net loss | (4,457,022 | ) | (814,133 | ) | $ | (5,362,060 | ) | $ | (2,375,483 | ) | ||||||
| Other comprehensive loss: | ||||||||||||||||
| Foreign currency translation gain (loss) | (30,549 | ) | 7,187 | (25,686 | ) | (16,526 | ) | |||||||||
| Total comprehensive loss | $ | (4,487,571 | ) | $ | (806,946 | ) | $ | (5,387,746 | ) | $ | (2,392,009 | ) | ||||
| Net loss per common share – basic and diluted | $ | (0.45 | ) | $ | (0.18 | ) | $ | (0.55 | ) | $ | (0.51 | ) | ||||
| Weighted average number of common shares outstanding – basic and diluted | 9,810,905 | 4,621,687 | 9,760,427 | 4,621,687 | ||||||||||||
See accompanying notes to the financial statements
Boxlight Corporation
Consolidated Condensed Statements of Cash Flows
For the Six Months Ended June 30, 2018 and 2017
(Unaudited)
Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (5,362,060 | ) | $ | (2,375,483 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Amortization of debt discount | 56,236 | - | ||||||
| Bad debt expense | 16,476 | (10,378 | ) | |||||
| Gain on settlement of accounts payable | (25,738 | ) | - | |||||
| Gain on settlement of derivative liabilities | (103,560 | ) | - | |||||
| Change in allowance for sales returns and volume rebate | 113,784 | 134,519 | ||||||
| Change in inventory reserve | (81,521 | ) | (6,577 | ) | ||||
| Change in fair value of derivative liability | 1,156,518 | - | ||||||
| Stock compensation expense | 1,110,644 | 84,531 | ||||||
| Depreciation and amortization | 381,638 | 374,910 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable – trade | (1,578,356 | ) | (344,086 | ) | ||||
| Inventories | 1,872,318 | 1,653,458 | ||||||
| Prepaid expenses and other current assets | (1,573,177 | ) | (741,348 | ) | ||||
| Other assets | - | 30,956 | ||||||
| Accounts payable and accrued expenses | 260,882 | (199,782 | ) | |||||
| Accounts payable and accrued expenses - related parties | 719,081 | 1,488,480 | ||||||
| Warranty reserve | 132,147 | 85,794 | ||||||
| Deferred revenues | 591,573 | 55,851 | ||||||
| Other short-term liabilities | - | (1,719 | ) | |||||
| Accrued interest on long-term debt – related parties | - | 78,684 | ||||||
| Net cash (used in) provided by operating activities | $ | (2,313,115 | ) | $ | 307,810 | |||
| Cash flows from investing activities: | ||||||||
| Cash receipts from acquisitions | 1,278,065 | - | ||||||
| Cash paid for acquisitions | (410,138 | ) | - | |||||
| Net cash provided by investing activities | $ | 867,927 | $ | - | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from short-term debt | 10,512,486 | - | ||||||
| Proceeds from convertible note payable | - | 1,000,000 | ||||||
| Principal payments on short-term debt | (9,683,181 | ) | (720,291 | ) | ||||
| Principal payments on short-term debt-related party | - | (195,000 | ) | |||||
| Proceeds from issuance of common stock | 420,000 | - | ||||||
| Proceeds from issuance of common stock upon exercise of options | 3 | - | ||||||
| Net cash provided by financing activities | $ | 1,249,308 | $ | 84,709 | ||||
| Effect of foreign currency exchange rates | (15,421 | ) | (24,449 | ) | ||||
| Net decrease in cash and cash equivalents | $ | (211,301 | ) | $ | 368,070 | |||
| Cash and cash equivalents, beginning of the period | 2,010,325 | 456,502 | ||||||
| Cash and cash equivalents, end of the period | $ | 1,799,024 | $ | 824,572 | ||||
| Supplemental cash flow disclosures: | ||||||||
| Cash paid for interest | $ | 289,174 | $ | 136,366 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Non-cash investment and financing transactions: | ||||||||
| Shares issued as consideration for the acquisition of Cohuborate | $ | 1,435,176 | $ | - | ||||
| Shares, notes payable and earn-out liability issued as consideration the acquisition of Qwizdom | $ | 1,894,570 | $ | - | ||||
| Additional contribution from settlement of related party derivative liability | $ | 1,149,580 | $ | - | ||||
| Issuance of Class A common shares to settle accounts payable – related parties | $ | - | $ | 1,500,000 | ||||
See accompanying notes to the financial statements.
Boxlight Corporation
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Boxlight Corporation (the “Company” or “Boxlight Parent”) was incorporated in the State of Nevada on September 18, 2014 with its headquarters in Atlanta, Georgia for the purpose of becoming a technology company that sells interactive educational products. In 2016, the Company acquired Boxlight, Inc., Boxlight Latinoamerica, S.A. DE C.V. (“BLA”) and Boxlight Latinoamerica Servicios, S.A. DE C.V. (“BLS”) (together, “Boxlight Group”), Mimio LLC (“Mimio”) and Genesis Collaboration, LLC (“Genesis”). In 2018, the Company acquired Cohuborate Ltd. (“Cohuba”) and, Qwizdom Inc. and its subsidiary Qwizdom UK Limited (“Qwizdom Companies”) and EOSEDU, LLC (“EOS”). In 2019, the Company acquired Modern Robotics, Inc. (“MRI”). The Company currently designs, produces and distributes interactive technology solutions to the education market.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the accounts of Boxlight Corporation,Parent, Boxlight Group, Mimio, Genesis, Cohuba, Qwizdom Companies, EOS and Qwizdom Companies.MRI. Transactions and balances among Boxlight Corporation,Parent, Boxlight Group, Mimio, Genesis, Cohuba, and Qwizdom Companies, EOS and MRI have been eliminated.
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 informationand interim financial reporting guidelines and rules and regulations of the Securities and Exchange Commission (“SEC”).Accordingly, they do not include all of the information and footnotesnotes required by GAAP for complete consolidated 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, 20172018 and notes thereto contained in the Company’s Annual Report on Form 10-K/A.10-K. Certain information and footnote disclosurenote disclosures normally included in the consolidated financial statements have been condensed. The December 31, 2018 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. Actual amounts could differ from those estimates.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are stated at historical carryingcontractual amounts, net of an allowance for doubtful accounts. AllowanceThe allowance for doubtful accounts represents management’s estimate of the amountamounts that ultimately will not be realized in cash. The Company reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical payment trends, the age of receivables and knowledge of the individual customers. When the analysis indicates, management increases or decreases the allowance accordingly. However, if the financial condition of our customers were to deteriorate, additional allowances might be required.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value and includesinclude spare parts and finished goods. Inventories are primarily determined using the specific identification method and the first-in, first-out (“FIFO”) cost method. Cost includes direct cost from the contract manufacturer (“CM”) or original equipment from manufacturer (“OEM”), plus material overhead related to the purchase, inbound freight and import duty costs.
The Company continuously reviews its inventory levels to identify slow-moving merchandise and markdowns necessary to clear slow-moving merchandise, which reduces the cost of inventories to its estimated net realizable value. Consideration is given to a number of quantitative and qualitative factors, including current pricing levels and the anticipated need for subsequent markdowns, aging of inventories, historical sales trends, and the impact of market trends and economic conditions. Estimates of markdown requirements may differ from actual results due to changes in quantity, quality and the mix of products in inventory, as well as changes in consumer preferences, market and economic conditions.
Intangible assets
Intangible assets other than goodwill are amortized using the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets other than goodwill periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No material impairments of intangible assets have been identified during any of the periods presented. Intangible assets and goodwill areGoodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-basedmarket approach. Goodwill is not amortized and is not deductible for tax purposes.
DERIVATIVES
The Company classifies Common Stockcommon stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions as either an asset or a liability. The Company assesses classification of its freestanding derivatives at each reporting date to determine whether a change in classification between equity and liabilities is required.
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.
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, and debt, 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.
DerivativesDerivative liabilities and the earn–out payable are recorded at fair value at each period end.
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.
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).
As required by Accounting Standard Codification (“ASC”) Topic No. 820 - 10Fair Value Measurement, financialFinancial 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.
As of March 31, 2019, the Company adopted ASU 2018 -13. 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 June 30,March 31, 2019 and December 31, 2018:
| Markets for Identical Assets | Other Observable Inputs | Significant Unobservable Inputs | Carrying Value as of | |||||||||||||
| Description | (Level 1) | (Level 2) | (Level 3) | March 31,2019 | ||||||||||||
| Derivative liabilities - warrant instruments | $ | - | $ | - | $ | 2,531,532 | $ | 2,531,532 | ||||||||
| Earn-out payable – related party | - | - | 410,000 | 410,000 | ||||||||||||
| $ | 2,941,532 | $ | 2,941,532 | |||||||||||||
| Markets for Identical Assets | Other Observable Inputs | Significant Unobservable Inputs | Carrying Value as of June 30, | Markets for Identical Assets | Other Observable Inputs | Significant Unobservable Inputs | Carrying Value as of | |||||||||||||||||||||||||
| Description | (Level 1) | (Level 2) | (Level 3) | 2018 | (Level 1) | (Level 2) | (Level 3) | December 31, 2018 | ||||||||||||||||||||||||
| Derivative liabilities - warrant instruments | $ | - | $ | - | $ | 1,891,704 | $ | 1,891,704 | $ | - | $ | - | $ | 326,452 | $ | 326,452 | ||||||||||||||||
| Earn-out payable – related party | - | - | 410,000 | 410,000 | ||||||||||||||||||||||||||||
| $ | 1,891,704 | $ | 1,891,704 | $ | 736,452 | $ | 736,452 | |||||||||||||||||||||||||
REVENUE RECOGNITION
Revenue is comprised of product sales and service revenue, net of sales returns, co-operative advertising credits, early payment discounts, and special incentive payments (“SPIFF”) paid to the value-added resellers (“VARs”). The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured.
Revenue from product sales is derived from the sale of projectors, interactive panels and related accessories. Evidence of an arrangement consists of an order from its distributors, resellers or end users. The Company considers delivery to have occurred once title and risk of loss has been transferred.
Service revenue is comprised of product installation services and training services. These service revenues are normally entered into at the time products are sold. Service prices are established depending on product equipment sold and include a cost value for the estimated services to be performed based on historical experience. The Company outsources installation and training services to third parties and recognizes revenue upon completion of the services. The Company also performs training and professional development services and recognizes revenue upon completion of the services.
The Company evaluates the criteria outlined in FASB ASCAccounting Standards Codification (“ASC”) Subtopic 605-45, Principal“Principal Agent Considerations,” in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as revenue. Generally, when the Company is primarily obligated in a transaction, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded at the gross amount. If the Company is not primarily obligated and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, the Company generally records the net amounts as revenue earned.
The Company generally does not allow product returns other than under warranty. However, the Company, on a case by case basis, will grant exceptions, mostly “buyer’s remorse” where the VAR’s end user customer either did not understand what they were ordering, or determined that the product did not meet their needs. An allowance for sales returns is estimated based on an analysis of historical trends.
While the Company uses resellers and distributors to sell its products, the Company’s sale agreements do not contain any special pricing incentives, right of return or other post shipment obligations.
The Company has a warranty policy to provide 12 to 36 months warranty coverage on projectors, displays, accessories, batteries and computers except when sold through a “Premier Education Partner” or sold to schools where the Company provides a 60-month warranty. The Company establishes a liability for estimated product warranty costs at the time the related product revenue is recognized, if the liability is expected to be material. The warranty obligation is affected by historical product failure rates and the related use of materials, labor costs and freight incurred in correcting any product failure. Should actual product failure rates, use of materials, or other costs differ from the Company’s estimates, additional warranty liabilities could be required, which would reduce its gross profit.
The Company offers sales incentives where the Company offers discounted products delivered by the Company to its resellers and distributors that are redeemable only if the resellers and distributors complete specified cumulative levels of revenue agreed to and written into their reseller and distributor agreements through an executed addendum. The resellers and distributors have to submit a request for the discounted products and cannot redeem additional discounts within 180 days from the date of the discount given on like products. The value of the award products as compared to the value of the transactions necessary to earn the award is generally insignificant in relation to the value of the transactions necessary to earn the award. The Company estimates and records the cost of the products related to the incentive asagainst revenues based on analyses of historical data.
SHARE-BASEDSTOCK COMPENSATION
The Company estimates the fair value of each share-based compensation award at the grant date by using the Black-Scholes option pricing model. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-basedShare-based compensation expense is recognized based on awards ultimately expected to vest. Excess tax benefits, if any, are recognized as an addition to paid-in capital.
SUBSEQUENT EVENTS
The Company has evaluated all transactions through the financial statement issuance date for subsequent event disclosure consideration.
NEW ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting StandardsStandard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new guidance provides new criteria for recognizing revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance requires expanded disclosures to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. Quantitative and qualitative information will be provided about the significant judgments and changes in those judgments that management made to determine the revenue that is recorded. This accounting standard updates, as amended, will beSince the Company is an Emerging Growth Company, the ASU is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Earlier application is permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Early adoption is permitted, but no earlier than fiscal 2017. Since the company is an Emerging Growth Company, adoption is not required until 2019. The Company is currently assessing the provisions of the guidance and has not determined the impact of the adoption of this guidance on its consolidated financial statements.
In February 2016, a pronouncement wasthe FASB issued by FASB that creates new accounting and reporting guidelines for leasing arrangements.ASU 2016-02, “Leases” (Topic 842). 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. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.The new standardleases. Since the Company is an Emerging Growth Company, the ASU is effective for annual reporting periods beginning after December 15, 2018, including2019, and interim periods within thatannual reporting period, with earlyperiods beginning after December 15, 2020. Earlier application is permitted. The new standard is to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the new pronouncement on its financial statements.
During the quarter the Company adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The new guidance modifies the disclosure requirements for fair value measurement, most notably eliminating the need to disclose the amount and reasons for transfers between Level 1 and Level 2, the policy for timing of transfers between levels, and the valuation processes for Level 3 measurements. Certain disclosure modifications are not yet applicable to the Company as an emerging growth company. Those include the requirements added to Topic 820, such as enhanced disclosures regarding uncertainty, providing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 measurements, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
There were various other accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our financial position, operations or cash flows.
NOTE 2 – GOING CONCERN
These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary debt or equity financing to continue operations, and the attainment of profitable operations. As of June 30, 2018,March 31, 2019, the Company had an accumulated deficit of $17,390,448$23,893,294 and a working capital deficit of $2,060,985.$4,944,232. During the sixthree months ended June 30, 2018,March 31, 2019, the Company incurred a net loss of $5,362,060$4,687,023 and net cash usedprovided in operations was $2,313,115.$564,744. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after the issuance date of these financial statements. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company is seeking to obtain funds for operations from its public or private sales of equity or debt securities or from bank or other loans.
NOTE 3 – ACQUISITIONS
On May 9, 2018, the Company acquired 100% of the share capital of Cohuborate, Ltd. based in Lancashire, England. Cohuborate produces, sells and distributes interactive display panels designed to provide new learning and working experience through high-quality technologies and solutions through in-room and room-to-room multi-device multi-user collaboration. AlthoughThe acquisition described below was accounted for as a development stage company with minimal revenues to date, we believe that Cohuborate will enhance our software capability and product offerings. We purchased the Cohuborate shares for 257,200 shares of the Company’s Class A common stock and 100 British pound sterling (US$138). The Company will account for the acquisition using the acquisition method of accounting,business combination which requires, among other things, that most assets acquired, and liabilities assumed be recognized at their estimated fair values as of the acquisition date on the balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired iswould be recorded as goodwill.
| Assets acquired: | ||||
| Cash | $ | 1,038,368 | ||
| Accounts receivable | 12,114 | |||
| Inventory | 315,438 | |||
| Other current assets | 22,928 | |||
| Property and equipment | 4,321 | |||
| Intangible assets | 190,430 | |||
| Total assets acquired | 1,583,599 | |||
| Total liabilities assumed | (148,285 | ) | ||
| Net assets acquired | $ | 1,435,314 | ||
| Consideration paid: | ||||
| Issuance of 257,200 shares of Class A common stock | $ | 1,435,176 | ||
| Cash | 138 | |||
| Total | $ | 1,435,314 | ||
On June 22, 2018, the Company acquired 100% of the share capital of Qwizdom, Inc. based in Washington and its subsidiary Qwizdom UK Limited based in Northern Ireland (the “Qwizdom Companies”). The Qwizdom companies develop software and hardware solutions that are quick to implement and designed to increase participation, provide immediate data feedback, and, most importantly, accelerate and improve comprehension and learning. We purchased the Qwizdom shares for (1) $410,000 in cash, (2) issuance of an 8% promissory note of $656,000 (3) issuance of 142,857 shares of the Company’s Class A common stock, and (4) an annual earn-out payment at maximum of $410,000 based on 16.4% of future consolidated revenues as defined in the agreement from 2018 to 2020. The Company will account for the acquisition using the acquisition method of accounting, which requires, among other things, that most assets acquired,has not yet finalized its evaluation and liabilities assumed be recognized at their estimated fair values as of the acquisition date on the balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill.
| Assets acquired: | ||||
| Cash | $ | 239,698 | ||
| Accounts receivable | 662,636 | |||
| Inventory | 132,411 | |||
| Other current assets | 20,857 | |||
| Property and equipment | 299,525 | |||
| Intangible assets | 904,666 | |||
| Goodwill | 222,667 | |||
| Total assets acquired | 2,482,460 | |||
| Total liabilities assumed | (177,890 | ) | ||
| Net assets acquired | $ | 2,304,570 | ||
| Consideration paid: | ||||
| Cash | $ | 410,000 | ||
| Promissory note | 656,000 | |||
| Issuance of 142,857 shares of Class A common stock | 828,570 | |||
| Earn out payable | 410,000 | |||
| Total | $ | 2,304,570 | ||
Unaudited Pro Forma Results Of Operations
The following table presents the unaudited condensed pro forma results of operations that reflect the acquisitions of Cohuba and Qwizdom Companies as if the acquisitions had occurred as of the first day of the period presented, adjusted for items that are directly attributable to the acquisitions. This information has been compiled from historical financial statements and is not necessarily indicative of the results that actually would have been achieved had the transaction already occurred or that may be achieved in the future.
| (in thousands) | For the six months ended June 30, 2018 | |||
| Revenues | $ | 16,895,000 | ||
| Cost of revenues | (12,692,000 | ) | ||
| Operating expenses | (8,420,000 | ) | ||
| Other incomes (expenses) | 118,000 | |||
| Income tax expense | ||||
| Net loss | $ | (4,099,000 | ) | |
| Net loss per common share | $ | (0.41 | ) | |
| Weighted average outstanding common shares – basic and diluted | 10,032,245 | |||
The pro forma combined results of operations were adjusted to include Cohuba and Qwizdom Companies’s operating results for the period from January 1, 2018 to the day that the Companies were acquired by the Company. In addition, the pro forma results of operations were adjusted for the following expenses:
| (in thousands) | For the six months ended June 30, 2018 | |||
| Record amortization expense of intangible assets acquired | $ | 50,000 | ||
The Company will engage a third-party valuation specialist to assist in the valuation and is in the process of completing its assessmentdetermination of the fair value of certain assets acquired and liabilities assumed. Thus, the preliminary measurementThe Company recorded provisional amounts based on initial measurements of the assets acquired and liabilities assumedassumed. The provisional amounts are subject to change and could result in goodwill, which could be significant. The Company will finalize the amounts recognized no later than one year from the acquisition date.
On March 12, 2019, the Company entered into an asset purchase agreement with MRI, based in Miami, Florida. Modern Robotics is engaged in the business of developing, selling and distributing science, technology, engineering and math (STEM), robotics and programming solutions to the global education market. The Company purchased the Modern Robotics net assets for 200,000 shares of the Company’s Class A common stock and a $70,000 note payable.
| Assets acquired: | ||||
| Cash | $ | 10,261 | ||
| Accounts receivable | 66,300 | |||
| Inventories | 303,768 | |||
| Prepaid | 24,413 | |||
| Intangible Assets | 175,902 | |||
| Total assets acquired | 580,644 | |||
| Total liabilities assumed | (10,644 | ) | ||
| Net assets acquired | $ | 570,000 | ||
| Consideration paid: | ||||
| Issuance of 200,000 shares of Class A common stock | $ | 500,000 | ||
| Note Payable | 70,000 | |||
| Total | $ | 570,000 |
NOTE 4 – ACCOUNTS RECEIVABLE - TRADE
Accounts receivable consisted of the following at June 30, 2018March 31, 2019 and December 31, 2017:2018:
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
| Accounts receivable - trade | $ | 5,907,040 | $ | 3,846,724 | ||||||||||||
Accounts receivable – trade | $ | 2,800,117 | $ | 4,658,352 | ||||||||||||
| Allowance for doubtful accounts | (217,350 | ) | (200,874 | ) | (160,500 | ) | (276,507 | ) | ||||||||
| Allowance for sales returns and volume rebates | (669,702 | ) | (555,918 | ) | (369,887 | ) | (747,119 | ) | ||||||||
| Accounts receivable - trade, net of allowances | $ | 5,019,988 | $ | 3,089,932 | $ | 2,269,730 | $ | 3,634,726 | ||||||||
NOTE 5 – INVENTORIES
Inventories consisted of the following at June 30, 2018March 31, 2019 and December 31, 2017:2018:
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
| Finished goods | $ | 3,351,160 | $ | 4,611,973 | $ | 3,298,610 | $ | 4,135,424 | ||||||||
| Spare parts | 227,091 | 187,158 | 463,263 | 285,575 | ||||||||||||
| Reserve for inventory obsolescence | (91,041) | (172,562 | ) | (241,851 | ) | (206,683 | ) | |||||||||
| Inventories, net | $ | 3,487,210 | $ | 4,626,569 | $ | 3,520,022 | $ | 4,214,316 | ||||||||
During the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, the Company wrote off obsolete inventories of $0 and $29,913,$0, respectively.
NOTE 6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at June 30, 2018March 31, 2019 and December 31, 2017:2018:
| 2018 | 2017 | |||||||
| Prepayments to vendors | $ | 1,746,602 | $ | 295,448 | ||||
| Employee receivables | - | 6,203 | ||||||
| Prepaid local taxes | - | 1,015 | ||||||
| Prepaid and refundable income taxes | 1,428 | 33,435 | ||||||
| Prepaid insurance | 78,964 | - | ||||||
| Prepaid licenses and other | 151,297 | 51,905 | ||||||
| Prepaid expenses and other current assets | $ | 1,978,291 | $ | 388,006 | ||||
| 2019 | 2018 | |||||||
| Prepayments to vendors | $ | 563,779 | $ | 1,033,896 | ||||
| Employee receivables | - | 1,794 | ||||||
| Prepaid local taxes | 10,522 | 1,614 | ||||||
| Prepaid insurance | 21,515 | - | ||||||
| Prepaid licenses and other | 346,207 | 176,853 | ||||||
| Prepaid expenses and other current assets | $ | 942,023 | $ | 1,214,157 | ||||
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2018March 31, 2019 and December 31, 2017:2018:
| Useful lives | 2018 | 2017 | ||||||||
| Building | 50 years | $ | 205,944 | $ | - | |||||
| Building improvements | 15 years | 9,997 | - | |||||||
| Leasehold improvements | 9-10 years | 82,060 | 3,355 | |||||||
| Office equipment | 2-7 years | 31,018 | 21,341 | |||||||
| Other equipment | 5 years | 42,485 | 42,485 | |||||||
| Property and equipment, at cost | 371,504 | 67,181 | ||||||||
| Accumulated depreciation | (47,727 | ) | (37,429 | ) | ||||||
| Property and equipment, net of accumulated depreciation | $ | 323,777 | $ | 29,752 | ||||||
| Useful lives | 2019 | 2018 | ||||||||
| Building | 50 years | $ | 199,708 | $ | 199,708 | |||||
| Building improvements | 15 years | 9,086 | 9,086 | |||||||
| Leasehold improvements | 9-10 years | 3,355 | 3,355 | |||||||
| Office equipment | 2-7 years | 36,450 | 36,450 | |||||||
| Other equipment | 5 years | 42,485 | 42,485 | |||||||
| Property and equipment, at cost | 291,084 | 291,084 | ||||||||
| Accumulated depreciation | (75,053 | ) | (64,675 | ) | ||||||
| Property and equipment, net of accumulated depreciation | $ | 216,031 | $ | 226,409 | ||||||
For the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, the Company recorded depreciation expense of $10,298$10,378 and $20,841$4,657, respectively.
NOTE 8 – INTANGIBLE ASSETS AND GOODWILL
Intangible assets and goodwill consisted of the following at June 30, 2018March 31, 2019 and December 31, 2017:2018:
| Useful lives | 2018 | 2017 | Useful lives | 2019 | 2018 | |||||||||||||||
| Patents | 10 years | $ | 401,396 | $ | 67,395 | 9 years | $ | 81,683 | $ | 81,683 | ||||||||||
| Customer relationships | 10 years | 3,996,543 | 3,567,396 | 10 years | 4,009,355 | 4,009,355 | ||||||||||||||
| Technology | 5 years | 354,302 | 178,400 | |||||||||||||||||
| Domain | 15 years | 13,955 | 13,955 | |||||||||||||||||
| Trademarks | 10 years | 3,872,746 | 3,554,932 | 10 years | 3,917,590 | 3,917,590 | ||||||||||||||
| Domain | 15 years | 13,955 | - | |||||||||||||||||
| Intangible assets, at cost | $ | 8,284,640 | $ | 7,189,723 | $ | 8,376,885 | $ | 8,200,983 | ||||||||||||
| Accumulated amortization | (1,434,505 | ) | (1,063,165 | ) | (2,084,479 | ) | (1,848,710 | ) | ||||||||||||
| Intangible assets, net of accumulated amortization | $ | 6,850,135 | $ | 6,126,558 | $ | 6,292,406 | $ | 6,352,273 | ||||||||||||
| Goodwill from acquisition of EOS | N/A | $ | 78,411 | $ | 78,411 | |||||||||||||||
| Goodwill from acquisition of Qwizdom | $ | 222,667 | $ | - | N/A | 463,147 | 463,147 | |||||||||||||
| Goodwill from acquisition of Mimio | N/A | 44,931 | 44,931 | N/A | 44,931 | 44,931 | ||||||||||||||
| Goodwill from acquisition of Boxlight | N/A | 4,137,060 | 4,137,060 | N/A | 4,137,060 | 4,137,060 | ||||||||||||||
| $ | 4,404,658 | $ | 4,181,991 | $ | 4,723,549 | $ | 4,723,549 | |||||||||||||
For the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, the Company recorded amortization expense of $371,340$235,769 and $354,069$183,190, respectively.
| F-11 |
NOTE 9 – DEBT
The following is a summary of our debt at June 30, 2018March 31, 2019 and December 31, 2017:2018:
| 2018 | 2017 | |||||||
| Short-term debt – third parties | ||||||||
| Note payable – AHA | $ | - | $ | 250,000 | ||||
| Accounts receivable financing – Sallyport Commercial | 1,081,754 | 502,449 | ||||||
| Note payable-Harbor Gates Capital | 500,000 | - | ||||||
| Total short-term debt –third parties | 1,581,754 | 752,449 | ||||||
| Short-term debt – related parties | ||||||||
| Note payable – Logical Choice Corporation - Delaware | 54,000 | 54,000 | ||||||
| Current portion of long-term debt - Qwizdom shareholders | 109,333 | - | ||||||
| 163,333 | 54,000 | |||||||
| Convertible debt – related party | ||||||||
| Convertible note payable – Mark Elliott | 50,000 | 50,000 | ||||||
| Long-Term debt- related parties | ||||||||
| Note payable- Qwizdom shareholders | 546,667 | - | ||||||
| Total debt | $ | 2,341,754 | $ | 856,449 | ||||
| 2019 | 2018 | |||||||
| Debt – Third Parties | ||||||||
| Note payable – Lind Global | $ | 1,639,799 | $ | - | ||||
| Note payable - Radium 2 Capital | 450,317 | 725,159 | ||||||
| Note payable - Whitebirk Finance Limited | 120,698 | 127,329 | ||||||
| Accounts receivable financing – Sallyport Commercial | 735,817 | 953,739 | ||||||
| Note payable-Harbor Gates Capital | - | 500,000 | ||||||
| Total debt – third parties | 2,946,631 | 2,306,227 | ||||||
| Less: current portion of debt – third parties | 1,602,185 | 2,306,227 | ||||||
| Long-term debt -third parties | $ | 1,344,446 | $ | - | ||||
| Debt – Related Parties | ||||||||
| Note payable -Steve Barker | $ | 70,000 | $ | - | ||||
| Note payable – Qwizdom (Darin & Silvia Beamish) | 545,564 | 601,333 | ||||||
| Note payable – Logical Choice Corporation – Delaware | 54,000 | 54,000 | ||||||
| Note payable – Mark Elliott | 50,000 | 50,000 | ||||||
| Total debt – related parties | 719,564 | 705,333 | ||||||
| Less: current portion of debt – related parties | 446,231 | 377,333 | ||||||
| Long-term debt – related parties | $ | 273,333 | $ | 328,000 | ||||
| Total debt | $ | 3,666,195 | $ | 3,011,560 | ||||
Short-Term Debt - Third Parties:
AHA Note
On June 3, 2016, prior to the Company’s acquisition of Boxlight Group, Boxlight Group issued a promissory note to AHA Inc. Co Ltd. (“AHA”), a Korean corporation, in the amount of $1,895,413 to settle unpaid accounts payable of $1,866,418 for purchases of inventory. Interest shall be payable in the amount of 6.5% per annum. The principal was due and payable in eight equal monthly principal payments in the amount of $236,926 beginning on June 30, 2016. Interest was to be paid in consecutive monthly installments for eight months.
On November 29, 2017, the outstanding principal and interest were reduced to $500,000 related to a settlement agreement reached with AHA, resulting in a gain on settlement of $304,913. Pursuant to the settlement agreement, the Company was required to pay $250,000 on or before December 2017 and the remaining principal is due in six equal monthly payments of $41,667 commencing January 2018. On June 8, 2018, the Company satisfied in full the obligation due to AHA and received a notice of dismissal.
Accounts Receivable Financing – Sallyport Commercial Finance
On August 15, 2017, Boxlight Inc., and Genesis entered into a 12-month term account sale and purchase agreement with Sallyport Commercial Finance, LLC (“Sallyport”). Pursuant to the agreement, Sallyport agreed to purchase 85% of the eligible accounts receivable of the Company with a right of recourse back to the Company if the receivables are not collectible. This agreement requires a minimum monthly sales volume of $1,250,000 with a maximum facility limit of $6,000,000. Advances against this agreement accrue interest at 4% in excess of the highest prime rate publicly announced from time to time with a floor of 4.25%. In addition, the Company is required to pay a $950 audit fee per day. The Company granted Sallyport a security interest in all of Boxlight Inc. and Genesis’ assets.
As of June 30, 2018,March 31, 2019, outstanding principal and accrued interest were $1,081,754$735,817 and $0, respectively. For the sixthree months ended June 30, 2018,March 31, 2019, the Company incurred interest expense of $286,919.$169,199.
Harbor Gates Capital
On May 16, 2018, the Company entered into an unsecured promissory note agreement for $500,000 with Harbor Gates Capital. The note bears an interest rate of 7% and matures on February 16, 2019. In addition, the Company issued 5,715 shares of its Class A common stock valued at $56,236 to the lender in lieu of payment of origination fees which was recorded as original issue discount and fully amortized because of the short-term. If the Company fails to pay the note on the maturity date, the note may be converted into its Class A common stock at a price of $4.00 per share at the option of the holder. On March 14, 2019, the Company converted the note into 133,750 shares of Class A common stock including the accrued interest valued at $2.86 per share.
Radium Capital
On September 20, 2018, the Company entered into an agreement for the purchase and sale of future receipts with Radium Capital. Pursuant to the agreement, Radium provided proceeds of $1,000,000 to the Company based on expected future revenue. The cost of the proceeds was 26% of the loan amount plus a $10,000 origination fee. The origination fee was recorded as original issue discount and fully amortized due to the short-term nature of the agreement. The Company is required to make weekly payments of $26,636 commencing October 3, 2018 to repay the debt. As of June 30, 2018,March 31, 2019, outstanding principal and accrued interest were $500,000$450,317 and $4,315,$0, respectively.
Whitebirk Finance Limited
On September 20, 2018, the Company entered into an unsecured promissory note agreement for £98,701 with Whitebirk Finance Limited. The note bears an interest rate of 5% and matures on August 31, 2019. This note was entered to settle outstanding accounts payable between Cohuba and Whitebirk related to inventory purchases. As of March 31, 2019, outstanding principal and accrued interest were $120,698 and $3,740, respectively.
Lind Global Marco Fund, LP
On March 22, 2019, we entered into a securities purchase agreement with Lind Global Marco Fund, LP (the “Investor”) that contemplates a $4,000,000 working capital financing for Boxlight Parent and its subsidiaries. The investment is in the form of a $4,400,000 principal amount convertible secured Boxlight Parent note with a maturity date of 24 months. The note is convertible at the option of the Investor into our Class A voting common stock at a fixed conversion price of $4.00 per share. We will have the right to force the Investor to convert up to 50% of the outstanding amount of the note if the volume weighted average closing price of our Class A common stock trades above $8.00 for 30 consecutive days; and 100% of the outstanding amount of the note if the volume weighted average closing price of our Class A common stock trades above $12.00 for 30 consecutive days.
We received $2,000,000 in March and $2,000,000 in April 2019. As of March 31, 2019, the outstanding principal net of debt issuance cost and discount, and accrued interest were $1,639,799 and $8,679.
Short-Term Debt - Related Parties:
Line of Credit - Logical Choice Corporation-Delaware
On May 21, 2014, the Company entered into a line of credit agreement with Logical Choice Corporation-Delaware (“LCC-Delaware”), former sole member of Genesis. The line of credit allowed the Company to borrow up to $500,000 for working capital and business expansion. The funds when borrowed accrued interest at 10% per annum. Interest accrued on any advanced funds was due monthly and the outstanding principal and any accrued interest were due in full on May 21, 2015. In May 2016, the maturity date was extended to May 21, 2018. This loan is currently in default. The assets of Genesis have been pledged, but subordinated to Sallyport financing, as a security interest against any advances on the line of credit. As of June 30,March 31, 2019, outstanding principal and accrued interest under this agreement was $54,000 and $22,647, respectively. As of December 31, 2018, outstanding principal and accrued interest under this agreement was $54,000 and $18,594, respectively. As of December 31, 2017, outstanding principal and accrued interest under this agreement was $54,000 and $15,916,$21,316 respectively.
Convertible Notes Payable - Third Parties:
Convertible Note Payable – Mark Elliott
On January 16, 2015, the Company issued a note to Mark Elliott, the Company’s Chief Executive Officer, in the amount of $50,000. The note as amended iswas due on December 31, 2018 and bears interest at an annual rate of 10%, compounded monthly. The note is convertible into the Company’s common stock at the lesser of (i) $6.28 per share, (ii) a discount of 20% to the stock price if the Company’s common stock is publicly traded, or (iii) if applicable, such other amount negotiated by the Company. The note holder may convert all, but not less than all, of the outstanding principal and interest due under this note. On July 3, 2018, Mark Elliott, the Company’s Chief Executive Officer amended the note to eliminate the conversion provision of the note. As of June 30,March 31, 2019, outstanding principal and accrued interest under this note were $50,000 and $21,041, respectively. The note is currently in default. As of December 31, 2018, outstanding principal and accrued interest under this note were $50,000 and $17,288, respectively. As of December 31, 2017, outstanding principal and accrued interest under this note were $50,000 and $14,808,$19,808, respectively.
Long-Term Debt - Related Parties:
Long Term Note Payable- Qwizdom Shareholders
On June 22, 2018, the Company issued a note to Darin and Silvia Beamish, previous 100% shareholders of Qwizdom, in the amount of $656,000 bearing an 8% interest rate. The note was issued as a part of the purchase price pursuant to the Stock Purchase agreement. The principal and accrued interest of the $656,000 note is due and payable in 12 equal quarterly payments. The first quarterly payment iswas due on the last business day of March 2019September 2018 and subsequent quarterly payments are to be made ondue through June 2021. Principal and accrued interest become due and payable in full upon the last business daycompletion of the 6th, 9th and 12th calendar month and quarterly thereafter until the “Maturity Date”. The Maturity Date is defined as the earlier of (i) our completing a public offering of Class A common stock or private placement of its debt or equity securities (each a “Financing”) that results in our receipt of gross proceeds from such Financing offor $10,000,000 or more, or (ii) that date which shall be the last business day of July 2021.more. As of June 30, 2018,March 31, 2019, outstanding principal and accrued interest under this note were $656,000$545,564 and $1,150,$10,762, respectively. The principalPrincipal in the amount of $109,333$273,333 is due within a year from June 30, 2018.March 31, 2019.
NOTE 10 – DEFERRED REVENUE
The Company has future performance obligations for separately priced extended warranties sold related to its Lamps for Life program and advances from customers. Activity during the three months ended March 31, 2019 and 2018:
| March 31, 2019 | March 31, 2018 | |||||||
| Balance, beginning of year | $ | 1,073,014 | $ | 1,302,717 | ||||
| Additions | 208,427 | 71,903 | ||||||
| Amortization | (735,933 | ) | (715,462 | ) | ||||
| Balance, ending of year | 545,508 | 659,158 | ||||||
| Deferred revenue – short-term | 440,092 | 483,243 | ||||||
| Deferred revenue – long-term | $ | 105,416 | $ | 175,915 | ||||
NOTE 1011 – DERIVATIVE LIABILITIES
At June 30, 2018OnMarch 31, 2019 and December 31, 2017,2018, the Company had warrants that contain net cash settlement provisionprovisions or do not have fixed settlement provisions because their conversion and exercise prices may be lowered if the Company issues securities at lower prices in the future. The Company concluded that they arethe warrants should be accounted for as derivative liabilities. In determining the fair value of the derivative liabilities, the Company used the binomialblack-scholes option pricing model at June 30,March 31, 2019 and 2018:
| December 31, 2017 | ||||
| Common stock issuable upon exercise of warrants | 1,112,476 | |||
| Market value of common stock on measurement date | $ | 5.11 | ||
| Exercise price | $ | 3.94 to $5.79 | ||
| Risk free interest rate(1) | 2.43 – 2.63 | % | ||
| Expected life in years | 1.5 – 3.5 years | |||
| Expected volatility (2) | 68 – 72 | % | ||
| Expected dividend yields (3) | 0 | % | ||
| March 31, 2019 | ||||
| Common stock issuable upon exercise of warrants | 1,191,999 | |||
| Market value of common stock on measurement date | $ | 3.20 | ||
| Exercise price | $ | 1.20 | ||
| Risk free interest rate (1) | 2.21 – 2.4 | % | ||
| Expected life in years | 0.76 – 2.76 years | |||
| Expected volatility (2) | 64 – 119 | % | ||
| Expected dividend yields (3) | 0 | % | ||
| March 31, 2018 | ||||
| Common stock issuable upon exercise of warrants | 1,032,717 | |||
| Market value of common stock on measurement date | $ | 4.06 | ||
| Exercise price | $ | 7.70 to $7.0 | ||
| Risk free interest rate (1) | 2.27 | % | ||
| Expected life in years | 1.76 years | |||
| Expected volatility (2) | 72.36 | % | ||
| Expected dividend yields (3) | 0 | % | ||
| (1) | The risk-free interest rate was determined by management using the applicable Treasury Bill as of the measurement date. | |
| (2) | The | |
| (3) | The Company does not expect to pay a dividend in the foreseeable future. |
The following table shows the change in the Company’s derivative liabilities rollforward for the sixthree months ended June 30,March 31, 2019 and 2018:
| Amount | ||||
| Balance, December 31, 2017 | $ | 1,857,252 | ||
| Initial valuation of derivative liabilities upon issuance of warrants | 131,074 | |||
| Cancellation of warrants | (1,253,140 | ) | ||
| Change in fair value of derivative liabilities | 1,156,518 | |||
| Balance, June 30, 2018 | 1,891,704 | |||
| Amount | ||||
| Balance, December 31, 2018 | $ | 326,452 | ||
| Initial valuation of derivative liabilities upon issuance of warrants | 42,585 | |||
| Change in fair value of derivative liabilities | 2,162,495 | |||
| Balance, March 31, 2019 | $ | 2,531,532 | ||
| Amount | ||||
| Balance, December 31, 2017 | $ | 1,857,252 | ||
| Initial valuation of derivative liabilities upon issuance of warrants | 24,226 | |||
| Change in fair value of derivative liabilities | (1,035,159 | ) | ||
| Balance, March 31, 2018 | $ | 846,319 | ||
The change in fair value of derivative liabilities includes losslosses from exercise price modifications.
NOTE 1112 – EQUITY
Preferred Shares
The Company’s articles of incorporation provide that the Company is authorized to issue 50,000,000 preferred shares consisting of: 1) 250,000 shares of non-voting Series A preferred stock, with a par value of $0.0001 per share; 2) 1,200,000 shares of voting Series B preferred stock, with a par value of $0.0001 per share; 3) 270,000 shares of voting Series C preferred stock, with a par value of $0.0001 per share; and 4) 48,280,000 shares to be designated by the Company’s Board of Directors.
The Company issued 1,000,000 shares of Series B preferred stock for the acquisition of Genesis and 270,000 shares of Series C preferred stock for the acquisition of Boxlight Group. Upon the completion of the initial public offering (“IPO”) in November 2017, all shares of Series B and C preferred stock related to the acquisitions of Genesis and Boxlight Group were converted to Class A common stock.
Upon completion of the Company’s IPO, an aggregate of 250,000 shares of the Company’s non-voting convertible Series A preferred stock were issued to Vert Capital for the acquisition of Genesis. All of the Series A preferred stock shall be automatically converted into Class A common stock no later than November 30, 2018.
Common Stock
The Company’s common stock consists of:of 1) 150,000,000 shares of Class A voting common stock and 2) 50,000,000 shares of Class B non-voting common stock. Class A and Class B common stock have the same rights except that Class A common stock is entitled to one vote per share while Class B common stock has no voting rights. Upon any public or private sale or disposition by any holder of Class B common stock, such shares of Class B common stock shall automatically convert into shares of Class A common stock. As of June 30, 2018,March 31, 2019, and December 31, 2017,2018, the Company had 10,056,09410,588,118 and 9,558,99710,176,433 shares of Class A common stock issued and outstanding, respectively. No Class B shares were outstanding at June 30, 2018March 31, 2019 and December 31, 2017.2018.
Issuance of common stock
On January 8, 2018,During the three months ended March 31, 2019, the Company issued 60,0006,169 shares of common stock in lieu of payment for services with an aggregate amount of $12,000.
On March 12, 2019, the Company issued 200,000 shares of common stock to K Laserthe shareholder of Modern Robotics, Inc. valued at $7.00$2.50 per share, for cash of $420,000.related to the asset purchases agreement.
On April 13, 2018,March 14, 2019, the Company issued 1,015133,750 shares of common stock to Tysadco Partners valued at $3.94$2.86 per share to Harbor Gates Capital to settle the $500,000 outstanding convertible note including accrued interest.
On March 22, 2019, the Company issued 71,766 shares of common stock valued at $2.78 per share in lieu of payment of professional fees.
On May 9, 2018, the Companyclosing fees of the convertible debt issued 257,200 shares of common stock to the shareholders of Cohuborate valued at $5.58 per share related to the acquisition of 100% of Cohuborate, Ltd.
On May 15, 2018, the Company issued 416 shares of common stock to Tysadco Partners valued at $9.62 per share in lieu of payment of professional fees.
On May 16, 2018, the Company issued 5,715 shares of common stock to a third-party lender valued at $9.84 per share in lieu of payment of origination fees.
On June 15, 2018, the Company issued 694 shares of common stock to Tysadco Partners valued at $5.76 per share in lieu of payment of professional fees.
On June 22, 2018, the Company issued 142,857 shares of common stock to the shareholders of Qwizdom, Inc. valued at $5.80 per share related to the acquisition of 100% of Qwizdom.Lind Global.
Exercise of stock options
On March 20, 2018, the former Chief Financial Officer exercised 29,200No stock options and paid a total of $3 forwere exercised during the exercise price.three months ended March 31, 2019.
NOTE 1213 – SHARE-BASEDSTOCK COMPENSATION
On September 19, 2014, the Board approved the Company’s 2014 Stock Option Plan. 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 plan is 2,390,4382,690,438 shares. Grants made under this plan must be approved by the Company’s Board of Directors. As of June 30, 2018,March 31, 2019, the Company had 661,526985,226 shares reserved for issuance under the plan. In 2018, the Board of Directors approved an increase in the number of shares available for grant by 300,000 shares to 2,690,438 shares. The increase is not finalized and subject to shareholder approval.
Stock Options
Under our stock option program, 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 (strike price). The options become exercisable over a range of immediateimmediately vested to 4-yeara four-year vesting period and expire 5 years from the grant date, unless stated differently in the option agreements, if they are not exercised. Stock options, excluding immediately vested, have no financial statement effect on the date they are granted but rather are reflected over time through recording compensation expense and increasing shareholder’s equity.expense. We record compensation expense based on the estimated fair value of the awards that vest and that amount is amortized as compensation expense on a straight- linestraight-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.
Following is a summary of the option activities during the sixthree months ended June 30, 2018:March 31,2019:
| Number of Units | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | ||||||||||
| Outstanding, December 31, 2017 | 812,574 | $ | 3.01 | 5.64 | ||||||||
| Granted | 987,500 | $ | 5.14 | |||||||||
| Exercised | (29,200 | ) | $ | 0.0001 | ||||||||
| Cancelled | (71,162 | ) | $ | 4.69 | ||||||||
| Outstanding, June 30, 2018 | 1,699,712 | $ | 4.21 | 5.04 | ||||||||
| Exercisable, June 30, 2018 | 769,934 | $ | 3.00 | 5.24 | ||||||||
| Number of Units | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | ||||||||||
| Outstanding, December 31, 2018 | 1,718,024 | $ | 4.18 | 4.64 | ||||||||
| Granted | 20,000 | $ | 2.50 | |||||||||
| Cancelled | (32,812 | ) | $ | 5.40 | ||||||||
| Outstanding, March 31,2019 | 1,705,212 | $ | 4.14 | 4.47 | ||||||||
| Exercisable, March 31,2019 | 1,182,426 | $ | 3.72 | 4.25 | ||||||||
The Company estimates the fair value of each stock option award on the date of grant using a Black- ScholesBlack-Scholes option pricing model. As of June 30, 2018,March 31, 2019, the options had an intrinsic value of approximately $2.3$0.5 million.
On January 2, 2018,March 12, 2019, the Company granted 100,000issued 20,000 stock options, each, 300,000 options in total, to its President, Chief Executive Officer and former Chief Financial OfficerSteve Barker with an exercise price of $5.01$2.50 per share vesting monthly over one year.share. The expiration date of these options is five10 years from the grant date. These options had an aggregate fair value of approximately $689,000$31,436 on the grant date that was calculated using the Black-Scholes option-pricing model.
On January 2, 2018, the Company granted 200,000 stock options to its Chief Operating Officer with an exercise price of $5.01 per share vesting monthly over one year. The expiration date of these options is five years from the grant date. These options had a fair value of approximately $459,000 on the grant date that was calculated using the Black-Scholes option-pricing model.
On February 14, 2018, the Company granted an aggregate of 367,500 stock options in total to its employees with an exercise price of $5.40 per share vesting quarterly over four years. The expiration date of these options is five years from the grant date. These options had an aggregated fair value of approximately $998,000 on the grant date that was calculated using the Black-Scholes option-pricing model.
On March 19, 2018, the Company granted 35,000 stock options to its Chief Financial Officer with an exercise price of $4.00 per share vesting monthly over one year. The expiration date of these options is five years from the grant date. These options had an aggregate fair value of approximately $65,000 on the grant date that was calculated using the Black-Scholes option-pricing model.
On March 29, 2018, the Company granted 25,000 stock options to one of its Board of Directors with an exercise price of $4.06 per share vesting quarterly over one year. The expiration date of these options is five years from the grant date. These options had an aggregated fair value of approximately $47,000 on the grant date that was calculated using the Black-Scholes option-pricing model.
On June 22, 2018, the Company granted 60,000 stock options to employees from the Qwizdom acquisition with an exercise price of $5.78 per share vesting annually over four years commencing June 22, 2019. The expiration date of these options is ten years from the grant date. These options have an aggregate fair value of approximately $214,000 on the grant date that was calculated using the Black-Scholes option-pricing model.
Variables used in the Black-Scholes option-pricing model for options granted during the sixthree months ended June 30, 2018March 31, 2019 include: (1) discount rate of 2.01% – 2.45%2.41% (2) expected life, using simplified method, of 3 – 3.756 years, (3) expected volatility of 66% – 68%168%, and (4) zero expected dividends.
Warrants
Following is a summary of the warrant activities during the sixthree months ended June 30, 2018:March 31, 2019:
| Number of Units | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | ||||||||||
| Outstanding, December 31, 2017 | 1,070,717 | $ | 7.57 | 2.12 | ||||||||
| Granted | 386,012 | $ | 5.96 | 3.50 | ||||||||
| Cancelled | (289,253 | ) | $ | 3.94 | 1.50 | |||||||
| Outstanding, June 30, 2018 | 1,167,476 | $ | 4.44 | 2.14 | ||||||||
| Exercisable, June 30, 2018 | 817,789 | $ | 3.99 | 1.51 | ||||||||
On April 2, 2018, the Company issued a warrant to purchase 5,000 shares of Class A common stock at a strike price of $4.76 per share to a consultant. The warrant will vest on a quarterly basis over 4 years beginning June 30, 2018. The expiration date is 5 years from the issue date. These warrants have an aggregate fair value of approximately $12,000 on the grant date that was calculated using the Black-Scholes option-pricing model.
On May 31, 2018, the Company cancelled warrants to purchase 289,253 shares of Class A common stock at strike prices of $3.94 per share. The Company recorded additional contribution of $1,149,580 and gain from settlement of liabilities of $103,560 in connection with the cancellation.
On June 21, 2018, the Company issued warrants to purchase 270,000 and 25,000 shares of Class A common stock at a strike price of $6.00 per share to Canaan Parish and a consultant, respectively, for future advisory services. The warrants are exercisable by the holder only after October 1, 2018 and expires on December 31, 2021. These warrants have an aggregate fair value of approximately $930,000 on the grant date that was calculated using the Binomial-Scholes option-pricing model. These warrants contain non-fixed settlement provision that the exercise price can be lower when a qualified events occur as defined in the agreement. The Company concluded that the instruments are accounted for as derivative liabilities. See Note 10. During the six months ended, the Company recorded approximately $131,000 compensation and derivative liabilities based on vesting term.
| Number of Units | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | ||||||||||
| Outstanding, December 31, 2018 | 1,184,121 | $ | 1.90 | 1.63 | ||||||||
| Granted | 60,827 | $ | 1.20 | |||||||||
| Outstanding, March 31, 2019 | 1,244,948 | $ | 1.50 | 1.35 | ||||||||
| Exercisable, March 31, 2019 | 1,191,199 | $ | 1.20 | 1.25 | ||||||||
During the sixthree months ended 796,047 and 316,429 warrants’ exercise pricesMarch 31, 2019, the Company issued 60,827 warrants to Dynamic Capital, the warrants were resetissued in accordance with the terms of the warrant agreement that required the issuance of additional shares when the Company issues shares to $3.94 and $5.79 per share, respectively, upon qualified event as defined in the agreement.
either raise additional capital or complete an acquisition.
Variables used in the binomial and black-scholesBlack-Scholes option-pricing model for options granted during the sixthree months ended June 30, 2018March 31, 2019 include: (1) discount rate of 2.37%2.45% – 2.65%2.52% (2) expected life of 3.53 – 4 years,1 year, (3) expected volatility of 65% – 75%66%, and (4) zero expected dividends.
Stock compensation expense
For the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, the Company recorded the following stock compensation in general and administrative expense:
| 2018 | 2017 | |||||||
| Stock options | $ | 967,597 | $ | 84,531 | ||||
| Warrants | 131,047 | - | ||||||
| Common stock | 12,000 | - | ||||||
| Total stock compensation expense | $ | 1,110,644 | $ | 84,531 | ||||
| 2019 | 2018 | |||||||
| Stock options | $ | 118,861 | $ | 496,688 | ||||
| Warrants | 42,585 | 24,226 | ||||||
| Total stock compensation expense | $ | 161,446 | $ | 520,914 | ||||
As of June 30, 2018,March 31, 2019, there was approximately $2.4$1.6 million of unrecognized compensation expense related to unvested options, which will be amortized over the remaining vesting period. Of that total, approximately $1.1$0.4 million is estimated to be recorded as compensation expense in the remaining six-monthsnine months of 2018.2019.
NOTE 1314 – OTHER RELATED PARTY TRANSACTIONS
Management AgreementAgreements
On November 30, 2017, the Company entered into a management agreement with Dynamic Capital, LLC, a Delaware limited liability company owned by the AEL Irrevocable Trust and managed by Adam Levin (“Dynamic Capital”). Pursuant to the agreement, Dynamic Capital shall perform consulting services for the Company relating to, among other things, sourcing and analyzing strategic acquisitions and introductions to various financing sources. Dynamic Capital shall receive a management fee payable in cash equal to 1.125% of total consolidated net revenues for the fiscal years ended December 31, 2017 and 2018, payable in monthly installments. The annual fee is subject to a cap of $750,000 in each of 2017 and 2018. At its option, Dynamic Capital may defer payment until the end of each year and receive payment in the form of shares of Class A common stock of the Company. Dynamic Capital agreed it shall not, nor shall it permit any of its affiliates, members, officers or associates, including the AEL Irrevocable Trust, to purchase, sell or otherwise trade in any shares of Boxlight common stock during the term of the agreement. As of June 30, 2018March 31, 2019, and December 31, 2017,2018, the Company had a payable of $202,755$377,417 and $35,632,$425,619, respectively, pursuant to the agreement.
On January 31, 2018, the Company entered into a management agreement with an entity owned and controlled by our President and Director, Michael Pope. Effective as of the first day of the same month that Mr. Pope’s employment with the Company shall terminate, 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 0.375% of the consolidated net revenues of the Company, payable in monthly installments, not to exceed $250,000 in any calendar year. At his option, Mr. Pope may defer payment until the end of each year and receive payment in the form of shares of Class A common stock of the Company.
Sales and Purchases - EDI
Everest Display Inc. (“EDI”), an affiliate of the Company’s major shareholder K-Laser, is a major supplier of products to the Company. For the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, the Company had purchases of $2,701,899$124,569 and $2,023,654,$1,926,324, respectively, from EDI. For the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, the Company had sales of $5,100$10,299 and $19,688,$5,100, respectively, to EDI. As of June 30, 2018,March 31, 2019, and December 31, 2017,2018, the Company had accounts payable of approximately of $4,871,000$5,519,827 and $4,325,000,$5,491,616, respectively, to EDI.
NOTE 1415 – COMMITMENTS AND CONTINGENCIES
Litigation
In July 2015, a supplier filed a lawsuit against the Company for outstanding payables owed by the Company of approximately $72,000. In February 2016, the supplier and the Company agreed to settle the indebted balance for $43,000 provided that the Company pays on or before March 16, 2016. The Company failed to make the payment and the judgement amount was therefore increased to approximately $70,000 plus interest and court costs of approximately $2,300. The Company is currently negotiating new terms with the supplier. On January 29, 2018, the Company entered into a Compromise Settlement and Release Agreement with the supplier, where the Company agreed to settle the indebted balance for $39,000. On January 30, 2018, the Company paid the settlement in full and received a release from the Court. The Company recorded a gain from the settlement of approximately $26,000.
On April 2017, a Garnishment Action was filed by Asahi Net, Inc. (“Asahi”) against Vert. Asahi was seeking to garnish funds in the amount of $2,180,881. The Company was listed as a garnishee in the Action because Vert had loaned money to the Company. The Company had already paid Vert in full satisfaction of the loan. On March 1, 2018, the Company was served a claim under the Georgia Uniform Voidable Transactions Act by Asahi, which was seeking to void transactions between the Company and Vert. The Company disputed these allegations. On April 26, 2018, Asahi filed a Notice of Dismissal for both the Garnishment Action as well as the claim under the Georgia Uniform Voidable Transactions Act.
On June 1, 2017, the Company was served with a lawsuit from Skyview seeking judgment on the $1,460,508 outstanding balance due under the currently defaulted Skyview Note, plus accrued interest thereon, and also seeking to foreclose on the assets of Mimio that is now owned and operated by Boxlight, Inc. The Company paid off the $1,460,508 outstanding balance in November 2017. Skyview filed a request for additional attorney fees in the amount of $67,826. On March 14, 2018, the Company satisfied the claim and the acknowledgement of satisfaction of judgement was received on March 21, 2018 from the Court.
Operating Lease Commitments
The Company leases twothree offices under non-cancelable lease agreements. The leases provide that the Company pays only a monthly rental and is not responsible for taxes, insurance or maintenance expenses related to the property. Future minimum lease payments of the Company’s operating leases with a term over one year subsequent to June 30, 2018March 31, 2019 are as follows:
| Year ending December 31, | Amount | |||||||
| 2018 | $ | 130,000 | ||||||
| Year ending December31, | Amount | |||||||
| 2019 | 40,400 | $ | 270,303 | |||||
| 2020 | 335,032 | |||||||
| 2021 | 315,840 | |||||||
| 2022 | 79,440 | |||||||
| Net Minimum Lease Payments | $ | 170,400 | $ | 1,000,615 | ||||
The Company also has another office lease on a month-to-month basis. For the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, aggregate rent expense was approximately $134,700$102,620 and $140,700,$67,000 respectively.
NOTE 1516 – CUSTOMER AND SUPPLIER CONCENTRATION
Significant customers and suppliers are those that account for greater than 10% of the Company’s revenues and purchases.
The Company’s revenues were concentrated among few customers for the sixthree months ended June 30,March 31, 2019 and 2018:
| Customer | Total revenues from the customer to total revenues for the six months ended June 30, 2018 | Deferred revenue from the customer as of June 30, 2018 (rounded to 000’s) | Total revenues from the customer to total revenues for the three months ended March 31, 2019 | Accounts receivable from the customer as of March 31, 2019 (rounded to 000’s) | |||||||||||||
| 1 | 29 | % | $ | 1,017,000 | 24 | % | $ | 235,000 | |||||||||
| Customer | Total revenues from the customer to total revenues for the three months ended March 31, 2018 | Accounts receivable from the customer as of March 31, 2018 (rounded to 000’s) | ||||||
| 1 | 13 | % | $ | 45,000 | ||||
| 2 | 12 | % | $ | (111,000 | ) | |||
| 3 | 11 | % | $ | 654,000 | ||||
The loss of the significant customer or the failure to attract new customers could have a material adverse effect on our business, results of operations and financial condition.
The Company’s purchases were concentrated among a few vendors for the sixthree months ended June 30,March 31, 2019 and 2018:
| Vendor | Total purchases from the vendor to total purchases for the six months ended June 30, 2018 | Accounts payable (prepayment) to the vendor as of June 30, 2018 (rounded to 000’s) | Total purchases from the vendor to total purchases for the three months ended March 31, 2019 | Accounts payable (prepayment) to the vendor as of March 31, 2019 (rounded to 000’s) | |||||||||||||
| 1 | 40 | % | $ | (343,000 | ) | 31 | % | $ | (125,000 | ) | |||||||
| 2* | 28 | % | $ | 4,871,000 | |||||||||||||
| 2 | 15 | % | $ | (21,000 | ) | ||||||||||||
| 3 | 16 | % | $ | (888,000 | ) | 12 | % | $ | (53,000 | ) | |||||||
* EDI, a related party. See note 13.
| Vendor | Total purchases from the vendor to total purchases for the three months ended March 31, 2018 | Accounts payable (prepayment) to the vendor as of March 31, 2018 (rounded to 000’s) | ||||||
| 1 | 44 | % | $ | 4,611,000 | ||||
| 2 | 29 | % | $ | (7,000 | ) | |||
The Company believes there are other suppliers that could be substituted should the supplier become unavailable or non-competitive.
NOTE 1617 – SUBSEQUENT EVENTS
On JulyApril 3, 2018, Mark Elliott,2019, the Company’s Chief Executive Officer amended his $50,000 note payable to eliminate the conversion provisionCompany received $1,845,000 net of legal and commitment fees from Lind Global as part of the $4,000,000 working capital financing secured by a convertible Boxlight Parent note.
On July 15, 2018, the Company issued 962 shares of Class A common stock at $4.16 per share to a consultant in lieu of payment for services.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, this Form 10-Q may contain forward-looking statements relating to Boxlight Corporation. All statements, trend analyses and other information relative to markets for our products and trends in revenue, gross margins and anticipated expense levels, as well as other statements including words such as “anticipate”, “believe”, “plan”, “estimate”, “expect”, and “intend”, and other similar expressions, constitute forward-looking statements. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties including those factors described below under “Factors That May Affect Future Operations”, and that actual results may differ materially from those contemplated by such forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.
Overview
We are a visual displayan educational technology company that is seeking to become a world leading innovator and integrator of interactive products and software for schools, as well as for business and government conferencing.learning spaces. We currently design, produce and distribute interactive projectors and distribute interactive LEDtechnologies, including flat panels, inprojectors, whiteboards and peripherals to the education market. We also distribute science, technology, engineering and math (or “STEM”) data logging products, to the educational market.including a portable science lab. All of our products are integrated into our classroom software suite that provides tools for whole class learning, assessment and collaboration.
To date, we have generated substantially all of our revenue from the sale of our software and expanding product line of projectors, LED panels, interactive whiteboards and display devicesdisplays to the K-12 U.S. educational market.
In addition, weWe have also implemented a comprehensive plan to reach profitability forboth from our core business operations and as a result of making strategic business acquisitions. We have already started to implement this strategy as set forth below. Highlights of thisour plan include:
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Recent Acquisitions
On March 12, 2019, we and our subsidiary, Boxlight Inc. acquired the assets and business of Modern Robotics, Inc., a New York corporation (“MRI”). The MRI assets were purchased for consideration including (i) $70,000 in the form of a promissory note and (ii) Two Hundred Thousand (200,000) shares of our Class A common stock. At closing, Boxlight Inc. entered into an employment agreement with Stephen Barker, MRI’s Chief Executive Officer, pursuant to which Mr. Barker will serve as Vice President of Robotics at Boxlight Inc. In addition, we granted options to Mr. Barker to purchase 20,000 shares of our Class A common stock at an exercise price of $2.52 per share.
Acquisition Strategy
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. |
As a result, we believe that an analysis of the historical costs and expenses of our target sellers prior to their acquisition will not provide guidance as to the anticipated results after acquisition. We anticipate that we will be able to achieve significant reductions in our costs of revenue and selling, general and administrative expenses from the levels currently incurred by the target sellers operating independently, thereby increasing our EBITDA and cash flows.
Components of our Results of Operations and Financial Condition
RevenueRevenues
Our revenue isrevenues are comprised of product revenue, installation revenue and professional development revenue less sales discounts.
| ● | Product revenue.Product revenue is derived from the sale of our 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. | |
| ● | Installation | |
| ● | Professional development revenue. We receive revenue from providing professional development services through third parties and our network of distributors. |
Cost of revenuerevenues
Our cost of revenue isrevenues are comprised of the following:
| ● | third-party logistics costs; | |
| ● | costs to purchase components and finished goods directly; | |
| ● | inbound and outbound freight costs and duties; | |
| ● | 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 | |
| ● | cost of professionals to deliver the professional development training. |
We outsource some of our warehouse operations and order fulfillment and purchase products from related entities and third parties. Our product costs will vary directly with volume and based on 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.
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: research and development and general and administrative.
Research and development.Research and development expense consistsconsist primarily of personnel related costs, prototype and sample costs, design costs and global product certifications mostly for wireless certifications.
General and administrative.General and administrative expense consists of personnel related costs, which include salaries, as well as the costs of professional services, such as accounting and legal, facilities, information technology, depreciation and amortization and other administrative expenses. We expect our general and administrative expense to increase in absolute dollars following the completion of our IPOdue to the anticipated growth of our business and related infrastructure as well as accounting, insurance, investor relations and other costs associated with becoming a public company. 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.
Other income (expense), net
Other income (expense), net consists of interest expense associated with our debt financing arrangements, changes in fair value of derivative liabilities, gain from settlements of liabilities and interest income earned on our cash. We do not utilize derivatives to hedge our foreign exchange risk, as we believe the risk to be immaterial to our results of operations.
Income tax expense
We are subject to income taxes in the United States, United Kingdom and Mexico in which we do business. The United Kingdom and Mexico hashave a statutory tax rate different from those in the United States. Additionally, certain of our international earnings are also taxable in the United States. Our effective tax rates will vary depending on the relative proportion of foreign to U.S. income, 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 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 six-month periods ended June 30, 2018 and 2017
Revenues.Total revenues for the six months ended June 30, 2018 were $15,660,342, as compared to $10,178,869 for the six months ended June 30, 2017, resulting in a 54% increase. The increase in revenues in 2018 is primarily attributable to the increase in sales volume.
Cost of Revenues.Cost of revenues for the six months ended June 30, 2018 was $12,454,053, as compared to $7,268,079 for the six months ended June 30, 2017, resulting in a 71% increase. Cost of revenues increased due to the increase in revenues as well as lower margins on initial deliveries of two large contracts.
Gross Profit.Gross profit for the six months ended June 30, 2018 was $3,206,289 as compared to $2,910,790 for the six months ended June 30, 2017. Gross margin decreased from 29% to 21% because of lower margins on initial deliveries of two large products. The decrease in gross margin was largely a result of lower margins on the initial deliveries for Clayton County, GA and Beaufort County, SC contracts. We have negotiated a reduction in cost of goods with our key vendor for these projects that will increase the margin for the remainder of these two contracts.
General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2018 was $6,920,598 as compared to $4,754,187 for the six months ended June 30, 2018. The increase resulted from increases in stock compensation expense and professional fees primarily related to the management agreement.
Research and Development Expense.Research and development expense was $269,603 and $297,552 for the six months ended June 30, 2018 and 2017, respectively. Research and development expense primarily consists of costs associated with the development of proprietary technology. The decrease was due to the Company’s decision to decrease research and development expenditures in 2018. The R&D investments are cyclical and we had limited major enhancements to our software products or new hardware launches. A significant portion of our research and development is now paid for by several of our contract manufacturers.
Other Income (Expense). Other expense for the six months ended June 30, 2018 was $1,378,148, as compared to $234,534 for the six months ended June 30, 2017. Other expense increased primarily due to the change in fair value of the derivative liability of $1,156,518 subject to the change of the Company’s stock price and the reset of exercise price of warrant liabilities.
Net loss.Net loss was $5,362,060 and $2,375,483 for the six months ended June 30, 2018 and 2017, respectively. The increase in the net loss was primarily due to lower margins on products with a higher cost of sales, stock compensation expense, and change in fair value of derivative liabilities.
For the three-month periods ended June 30,March 31, 2019 and 2018 and 2017
Revenues.Total revenues for the three months ended June 30, 2018March 31, 2019 were $9,663,657,$5,012,713, as compared to $5,984,440$5,996,685 for the three months ended June 30, 2017,March 31, 2018, resulting in a 61% increase.16% decrease. Typically, the sales volume in the first quarter is the lowest and varies from year to year. The increasedecrease in revenuesrevenue in 20182019 is primarily attributable to the fact that in the first quarter of 2018, the Company fulfilled a couple of large projects which resulted in an increase inof typical sales volume.for mimio teach, projectors and panels during that time period.
Cost of Revenues. Cost of revenues for the three months ended June 30, 2018March 31, 2019 was $7,938,340,$3,428,173, as compared to $4,273,396$4,515,713 for the three months ended June 30, 2017,March 31, 2018, resulting in an 86% increase.a 24% decrease. Cost of revenues consists primarily increasedof product cost and freight expenses. Cost of revenues decreased proportionally due to the increaseoverall decrease in revenues and lower margins on initial delivery of two large projects.revenues.
Gross Profit.Gross profit for the three months ended June 30, 2018March 31, 2019 was $1,725,317,$1,584,540, as compared to $1,711,044$1,480,972 for the three months ended June 30, 2017.March 31, 2018. Gross margin decreasedincreased from 29%25% to 18% largely32%, as a result of lower margins on initial delivery of two large projects. Thea shift in product mix to include higher margin product and services sales and a decrease in gross margin was largely a result of lower margins on the initial deliveries for Clayton County, GA and Beaufort County, SC contracts. We have negotiated a reduction in cost of goods with our key vendor for these projects that will increase the margin for the remainder of these two contracts.freight cost.
General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2018 was $3,726,585March 31, 2019 were $3,760,112 as compared to $2,302,981$3,194,013 for the three months ended June 30, 2017.March 31, 2018. The increase resulted from increasessalary expense as a result of new acquisitions in stock compensation expense, contract services, commissions and professional fees primarily related to the management agreement.2018.
Research and Development Expense.Expenses.Research and development expense was $177,098expenses were $235,996 and $107,107$92,505 for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Research and development expenseexpenses primarily consistsconsist of costs associated with the development of proprietary technology. The increase was due primarily to research and development contractors and attributable to salary expense. The R&D investments are cyclical and we had limited major enhancements to our software products or new hardware launches. A significant portion of our research and development is now paid for by several of our contract manufacturers.
Other Expense.Income (Expense).Other expense for the three months ended June 30, 2018March 31, 2019 was $2,278,656$(2,275,455) as compared to $115,089$900,508 for the three months ended June 30, 2017. OtherMarch 31, 2018. The increase in other expense was mainly consists of interest expense anddue to change in the fair value of derivative liability. The change in derivative liability was $2,191,677 and because of the change in the Company’s stock price and the reset of exercise price of warrant liabilities.
Net loss.Net loss was $4,457,022$4,687,023 and $814,133$905,038 for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. The increase in the net loss was primarily due to cost of sales, commission, stock compensation expensesalary, research and professional feesdevelopment and change in fair value of derivative liabilities.
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 presented on a basis consistentwhich are prepared in accordance with GAAP andwith EBITDA and Adjusted EBITDA, both non-GAAP financial measures of earnings.
EBITDA represents net incomeloss before income tax expense, interest income, interest expense, depreciation and amortization. Adjusted EBITDA represents EBITDA, plus change in fair value of derivative liabilities, stock compensation expense and non-recurring expenses. Our management uses EBITDA and Adjusted EBITDA as financial measures to evaluate the profitability and efficiency of our business model. We use these non-GAAP financial measures to assess the strength of the underlying operations of our business. These adjustments, and the non-GAAP financial measuremeasures that isare derived from them, provide supplemental information to analyze our operations between periods and over time. We find this especially useful when reviewing results of operations, which include large non-cash amortizations of intangibles assets from acquisitions. 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 table contains reconciliations of net lossesincome (loss) to EBITDA for the periods presented.
Reconciliation of net loss for the three months ended
June 30,March 31, 2019 and 2018 and 2017 to EBITDA and adjusted EBITDA
| (in thousands) | June 30, 2018 | June 30, 2017 | ||||||
| Net loss | $ | (4,457 | ) | $ | (814 | ) | ||
| Depreciation and amortization | 194 | 183 | ||||||
| Interest expense | 207 | 106 | ||||||
| EBITDA | $ | (4,056 | ) | $ | (525 | ) | ||
| Stock compensation expense | 636 | 38 | ||||||
| Change in fair value of derivative liabilities | 2,192 | - | ||||||
| Adjusted EBITDA | $ | (1,228 | ) | $ | (487 | ) | ||
Reconciliation of net loss for the six months ended
June 30, 2018 and 2017 to EBITDA and adjusted EBITDA
| (in thousands) | June 30, 2018 | June 30, 2017 | ||||||
| Net loss | $ | (5,362 | ) | $ | (2,375 | ) | ||
| Depreciation and amortization | 382 | 375 | ||||||
| Interest expense | 354 | 276 | ||||||
| EBITDA | $ | (4,626 | ) | $ | (1,724 | ) | ||
| Stock compensation expense | 1,111 | 85 | ||||||
| Change in fair value of derivative liabilities | 1,157 | - | ||||||
| Non-recurring IPO expenses | - | 53 | ||||||
| Adjusted EBITDA | $ | (2,358 | ) | $ | (1,586 | ) | ||
| (in thousands) | March 31, 2019 | March 31, 2018 | ||||||
| Net loss | $ | (4,687 | ) | $ | (905 | ) | ||
| Depreciation and amortization | 242 | 188 | ||||||
| Interest expense | 281 | 147 | ||||||
| EBITDA | $ | (4,164 | ) | $ | (570 | ) | ||
| Stock compensation expense | 161 | 521 | ||||||
| Change in fair value of derivative liabilities | 2,162 | (1,035 | ) | |||||
| Adjusted EBITDA | $ | (1,841 | ) | $ | (1,084 | ) | ||
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 June, 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.
We have been very proactive, and will continue to be proactive, in obtaining contracts during the fourth and first quarters that will help offset the seasonality of our business.
Liquidity and Capital Resources
As of June 30, 2018,March 31, 2019, we had cash and cash equivalents of $1,799,024$2,717,623 and a working capital deficit of $2,060,985.$4,944,232. For the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, we had net cash (used in) provided by operating activities of $(2,313,115)$564,744 and $307,810,net cash used of $2,050,132 respectively. We had net cash provided by investing activities of $867,927 for the six months ended June 30, 2018. In addition, we had net cash provided by$10,261 and $0, financing activities of $1,249,308$1,279,306 and $84,709,$487,515, respectively. We had accounts receivable net of $5,019,988 on June 30,allowances of $2,269,730 and $3,634,726 for the period ended March 31, 2019 and year ended December 31, 2018.
We financed our operations in 2018 primarily with an accounts receivable financing arrangement entered into with a lender. The lender agreed to purchase 85% of the eligible accounts receivable of the Company, up to $6 million, with the right of recourse. Our accounts receivable and our ability to borrow against accounts receivable provides 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 the business.
Our cash requirements consist primarily of day-to-day operating expenses, capital expenditures and contractual obligations with respect to facility leases and other operating leases. We lease all of 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.
Since theThe Company had an accumulated deficit and a net working capital deficit and net cash used in operations of approximately $2.3 million$4,944,232 for the sixthree months ended June 30, 2018, theseMarch 31, 2019. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after the issuance date of these financial statements. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Recent Financing
On March 22, 2019, we entered into a securities purchase agreement with Lind Global Marco Fund, LP (the “Investor”) that contemplates a $4,000,000 working capital financing for Boxlight Parent and its subsidiaries. The investment is in the form of a $4,400,000 principal amount convertible note secured by Boxlight Parent with a maturity date of 24 months. The note is convertible at the option of the Investor into our Class A voting common stock at a fixed conversion price of $4.00 per share. We will have the right to force the Investor to convert up to 50% of the outstanding amount of the note if the volume weighted average closing price of our Class A common stock trades above $8.00 for 30 consecutive days; and 100% of the outstanding amount of the note if the volume weighted average closing price of our Class A common stock trades above $12.00 for 30 consecutive days. At closing a total of $4,000,000 will be funded under the note.
We will needare required to raise additional funds to continuemake monthly interest payments on the note at the rate of 8% per annum and principal payments in 18 equal monthly installments of $244,444 each, commencing six months after closing. So long as shares of our operations. Insufficient funds may cause us to delay our delivery, enter into costly financing arrangements, including with certain customers, which may reduce our gross profit margins and loss of revenues due toClass A common stock are registered for resale under the inability to fulfill purchase orders. Management plans to raise additional funds through publicSecurities Act or private sales of equity or debt securities or from bank or other loans to fund operations until the Company is able to improve its margin or generate enough revenues to cover operating costs. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations. Additional equity financing, if available, may be dilutivesold without restriction on the number of shares or manner of sale, we have the right to make interest payments in the form of additional shares of Class A common stock. We have the right to prepay the convertible note at any time with no penalty (the “Buy-Back Right”). Should we exercise our shareholders. In addition,Buy-Back Right, the Company may never be able to generate sufficient revenue if any from its potential products.Investor will have the option of converting 25% of the outstanding $4.4 million principal amount of the note into shares of our Class A common stock.
The convertible note is secured by a lien on our assets and properties.
Critical Accounting Policies and Estimates
Our consolidated condensed financial statements are prepared in accordance with generally accepted accounting principles accepted in the United States. 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 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 of the 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. | Intangible assets | |
| 3. | Derivative liabilities | |
| 4. | Share-based compensation |
Emerging Growth Company
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. 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. |
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 consolidated condensed financial statements may not be comparable to companies that comply with public company effective dates.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
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 fiscal quarter ended March 31. 2018update (“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 related to the following:
| insufficient personnel resources within the accounting function to segregate the duties between preparation and review of financial statements; and | ||
| insufficient written policies and procedures over accounting transaction processing and period end financial disclosure, |
resulting in ineffective oversight in the establishment and proper monitoring controls over accounting and financial reporting.
Notwithstanding the existence of the internal control deficiencies, management believes that the consolidated condensed financial statements in this quarterly report on Form 10-Q fairly present, in all material respects, the Company’s financial condition as of the Evaluation Date, and results of its operations and cash flows for the Evaluation Date, in conformity with United States Generally Accepted Accounting Principles (“GAAP”).
(b) Changes in internal controls over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the six-month period ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Inherent Limitations on Effectiveness of Controls.
Because of the inherent limitations in all control systems, no control system can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of a person, by collusion of two or more people or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Notwithstanding these limitations, with the changes referenced above, we believe that our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.
(b) Changes in internal controls over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the three-month period ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
On June 1, 2017, a lawsuit was filed against the Company, Mimio LLC, Mim Holdings, VC2 Partners and Vert Capital Corp by Skyview Capital for breach of a $1,460,508 restated note. On September 11, 2017, we paid Skyview the sum of $1,577,653, which included the principal balance of $1,460,508, plus accrued interest of $117,145. Skyview filed a request for additional attorney fees in the amount of $67,826. On March 14, 2018, the Company satisfied the claim and received a release from the Court.NONE
In July 2015, a supplier filed a lawsuit for approximately $72,000 against Genesis Collaboration, LLC. Genesis was acquired by the Company in May 2016. On January 29, 2018 the Company entered into a Compromise Settlement and Release agreement with the supplier, where the Company agreed to settle the indebted balance for $39,000. On January 30, 2018, the Company paid the settlement in full and received a release from the Court.
In April 2017, a Garnishment Action was filed by Asahi Net, Inc. (“Asahi”) against a lender that the Company was indebted to. Asahi is seeking to garnish funds due from the Company to the lender. On March 1, 2018, the Company was served a claim under the Georgia Uniform Voidable Transactions Act by Asahi, which is seeking to void transactions between the Company and the lender. The Company disputes these allegations. The outcome is unknown, but we believe likely to be favorable to the Company. On April 26, 2018, Asahi filed a Notice of Dismissal for both the Garnishment Action as well as the claim under the Georgia Uniform Voidable Transactions Act.
Not Applicable.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
None.
| 9 |
The following exhibits are filed or furnished with this report:
| Exhibit No. | Description of Exhibit | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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 | ||
| By: | /s/ JAMES MARK ELLIOTT | |
| James Mark Elliott | ||
| Chief Executive Officer | ||
| May 15, 2019 | By: | /s/ TAKESHA BROWN |
| Takesha Brown | ||
Chief Financial Officer (Principal Financial and Accounting Officer) |