I have covered Boxlight Corporation (NASDAQ:BOXL) previously, so investors should view this as an update to my earlier articles on the company.
On Thursday, Boxlight Corporation or “Boxlight” reported mixed fourth quarter results as sales outperformed expectations while profitability was impacted by ongoing supply chain disruptions and one-time costs associated with the recent acquisition of FrontRow Calypso (“FrontRow”) and the retirement of legacy debt.
On a more positive note, management increased revenue expectations for 2022 from $230 million to $250 million and projected adjusted EBITDA of $26 million, more than double the $12.1 million recorded last year.
Adjusted for an expected $32 million in top-line contribution from FrontRow, organic growth calculates to approximately 18%.
While FrontRow is expected to grow at a slower rate, the business is highly profitable as evidenced by the 25% adjusted EBITDA margin projected for the FrontRow segment this year and gross margins north of 50% achieved in 2021.
Consequently, consolidated gross margin should see a nice uptick this year. On the conference call, management outlined medium-term expectations for gross margins to increase to above 30% with a long-term target of “closer to 40%”.
Even better, management projected positive cash flow for the year which would be quite an achievement given ongoing supply chain disruptions and substantial obligations under the company’s new credit facility with WhiteHawk Finance LLC, a division of WhiteHawk Capital Partners (“WhiteHawk”):
In order to finance the acquisition of FrontRow, the Company and substantially all of its direct and indirect subsidiaries, including Boxlight and FrontRow as guarantors, entered into a maximum $68.5 million term loan credit facility, dated December 31, 2021 (the “Credit Agreement”), with Whitehawk Finance LLC, as lender (the “Lender”), and White Hawk Capital Partners, LP, as collateral agent.
Under the terms of the Credit Agreement, the Company received an initial term loan of $58.5 million on December 31, 2021 (the “Initial Loan”) and was provided with a subsequent delayed draw facility of up to $10 million that may be provided for additional working capital purposes under certain conditions (the “Delayed Draw”). The Initial Loan and Delayed Draw are collectively referred to as the “Term Loans.” The proceeds of the Initial Loan were used to finance the Company’s acquisition of FrontRow, pay off all indebtedness owed to our existing lenders, Sallyport Commercial Finance, LLC and Lind Global Asset Management, LLC, pay related fees and transaction costs, and provide working capital. Of the Initial Loan, $8.5 million is subject to repayment on February 28, 2022, with quarterly interest payments commencing March 31, 2022 and the $50.0 million remaining balance plus any Delayed Draw loans becoming due and payable in full on December 31, 2025.
The Term Loans will bear interest at the LIBOR rate plus 10.75%; provided that after June 30, 2022, if the Company’s Senior Leverage Ratio (as defined in the Credit Agreement) is less than 2.25, the interest rate would be reduced to LIBOR plus 10.25%. Such terms are subject to the Company maintaining a borrowing base in terms compliant with the Credit Agreement.
In addition, WhiteHawk managed to extract:
- 528,169 million new common shares
- Dilution-protected warrants to purchase an additional 2,043,291 common shares at an exercise price of $2. The exercise price will reprice to a considerably lower level on March 31 “based on the arithmetic volume weighted average prices for the 30 trading days prior to March 31, 2022“
- A massive fee of $1.76 million
- An original issuer discount of $0.5 million
Even without considering the substantial time value of the warrants, the additional shares and fees paid to WhiteHawk result in an effective interest rate of almost 15% for the new credit facility.
Assuming an average $55 million balance under the facility, Boxlight would have to shoulder almost $6.5 million in annual interest expense.
On the flip side, the new credit facility enabled the company to repay the remaining toxic convertible notes issued to Lind Global Asset Management LLC (“Lind Global”) to partially finance the acquisition of Sahara Presentation Systems (“Sahara”) in 2020.
Remember also, the company still has to address the Series B and Series C Preferred Shares issued to former Sahara owners with an estimated $16 million cash redemption payment originally due at the end of last year.
While the company has yet to file its 10-K, I would assume the company having secured an extension.
After a disappointing second half of 2021, Boxlight management is projecting respectable organic growth and vastly improved profitability for this year. Particularly the recent acquisition of FrontRow Calypso looks like a great move as the transaction will lift margins by several hundred basis points and supports management’s expectations of positive cash flow for the year.
While Q1 guidance of $44 million in sales and adjusted EBITDA of $2 million remains nothing to write home about, the business should pick up considerably in Q2 and particularly Q3, which has historically been the company’s strongest quarter.
Should Boxlight achieve or even outperform profitability targets, I would expect the stock price to move back above the $2 level.
Speculative investors willing to give management the benefit of the doubt should consider scaling into the shares at current, depressed levels.
Given improved outlook and discounted valuation, I am raising my rating on the shares to “buy”.