Boxlight Corp Q3 FY2020 Earnings Call

Thank you. And welcome to the Boxlight Third Quarter 2020 Earnings Conference Call. By now, everyone should have access to the third quarter 2020 press release issued this morning. This call is being webcast and is available for replay. The remarks today will include forward-looking statements about future results of operations, business strategies and plans, customer relationships, market trends, and potential growth opportunities. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management’s current knowledge and expectations as of today and are subject to certain risks and uncertainties and may cause the actual results to differ materially from the forward-looking statements. A detailed discussion of such risks and uncertainties are contained in the company’s most recent Form 10-Q, Form 10-K, and other reports filed with the SEC. The company undertakes no obligation to update any forward-looking statements. On this call, management will refer to non-GAAP measures that, when used in combination with GAAP results, provide additional analytical tools to understand the company’s operations. The company has provided reconciliations to the most directly comparable GAAP financial measures in the earnings press releases, which will be posted on the Investor Relations section of the company’s website at investors.boxlight.com. And with that, I’ll hand the call over to Boxlight’s Chairman and Chief Executive Officer, Michael Pope. Sir, the floor is yours.

Good afternoon, everyone, and thank you for joining the call. Our progress during the third quarter was the most significant in our history and included fundraising of over $60 million in debt and equity, the acquisition of Sahara Presentation Systems, a leading interactive solution provider with significant penetration in the EMEA region, the addition of tremendous talent to our sales leadership, our formalized partnership with Samsung, enhancements to our product offering, and a drastically improved balance sheet and financial outlook. Although our revenue of $9.5 million and gross profit of 21% lag our expectations in Q3 due to several factors, including the effects of COVID-19, we are seeing increased demand in the fourth quarter and we are executing on a strong sales pipeline. With the addition of the Sahara operations and considering our quarter-to-date results and current pipeline, we expect to generate greater than $27 million in revenue and positive adjusted EBITDA for the fourth quarter. During the third quarter, we had several new wins with Interactive Flat Panel Displays, including Bennington Public Schools and Ord public schools in Nebraska, Granite School District in Utah, and Ohio County School District in West Virginia. We also began deployment of our MimioClarity Classroom Audio solution in two school districts in Michigan, installing over 300 units. We continue to deliver on key contracts such as San Diego Unified in California, Harford County Public Schools in Maryland, Tangipahoa Parish School System in Louisiana, and several independent school districts in Texas. Outside the U.S., our Latin America business is growing through key partnerships in Puerto Rico, Peru, and Costa Rica. In Europe, we delivered more than 500 Interactive Displays to the Academies Enterprise Trust in the UK and are seeing significant opportunities in Germany, Belgium, France, and the Netherlands. We continue to win business with strong partners such as Trox, CDW, Power Technology Solutions, Central Technologies, and several others. During the third quarter, we closed a $34.5 million secondary offering and received a $22 million investment from The Lind Partners. Additionally, we entered into a $6 million asset-based lending agreement with Sallyport Commercial Finance that provides substantially better terms than our previous factoring and PO finance facilities. On September 24th, using the proceeds from recent financings, we completed the acquisition of Sahara Presentation Systems, our most significant transaction to date, with a purchase price of approximately $80 million in cash and preferred stock. Headquartered in the United Kingdom, Sahara is a leader in providing audio-visual solutions for education and corporate environments, including its multi-award-winning touchscreens and digital signage products under the brand Clevertouch. Sahara is an ideal strategic fit with significant penetration in the EMEA market and tremendous management talent including, Mark Starkey as CEO; Pat Foley as CFO; and Sean Mark Lewis as CEO. In September, we added two seasoned sales leaders to our American sales organization, namely Scott Willett as Vice President of Sales and Dan Deem as Vice President of Sales, Platforms and Services. Both Scott and Dan bring tremendous experience in the industry from companies such as Apple, Promethean, Dell, and Panasonic, and will manage our sales organization in the Americas. In August, we formally announced our strategic partnership with Samsung Electronics America to bundle their displays with Boxlight software and professional development. We have dedicated substantial resources to the Samsung partnership and expect to begin delivering sales this quarter with substantial growth in 2021. As a result of our recent fundraising and the acquisition of Sahara, we closed the third quarter with a healthy balance sheet, including cash and cash equivalents of $10 million, inventory of $22 million, working capital of $25 million, and stockholders' equity of $44 million. We were recently selected as a finalist in five categories for the 2020 AV Awards, including coding for impact plus display as visual technology of the year, our UX Pro as collaboration technology of the year, and Clevertouch as manufacturer of the year. We were also nominated under the AV in action category for our COVID-19 reaction strategy. We are committed to providing best-in-class interactive technology solutions that improve engagement and communication in diverse business and education environments. We are proud of our progress during the third quarter to enhance our solution suite. We recently launched both our Clevertouch technologies non-interactive CM series with embedded digital signage and our Clevertouch technologies P45, which is our compact yet fully featured digital signage player. On October 1st, we introduced our Lynx Whiteboard software, which was completely redesigned for touchscreens with drag and drop, pinch to zoom, and easy swipe menus. Lynx Whiteboard runs across multiple platforms on an array of devices and is available for download in all major app stores. We are seeing positive interest in our subscription-based MimioConnect software platform designed for blended learning, which we announced in June of this year. We are demonstrating and testing the platform in several districts. We added various enhancements during the quarter including monitoring student engagement with teacher visibility and one-on-one text coaching. We are also completing development to provide compatibility with Samsung’s Kiazen operating system. Our MimioClarity audio solution is being piloted in several districts in Michigan and hybrid learning environments. MimioClarity allows teachers to amplify their voices while wearing masks to boost students in the classroom and those learning virtually. It is also available with a CareHawk system providing functionality for bells, public announcements, emergency notices, classroom-to-classroom communications, as well as classroom-to-administrative communications. We’ve also enhanced the Boxlight unplugged screen mirroring software to allow for nine simultaneous student-shared devices and have developed a Teacher Control Center, which allows the teacher to highlight student screens, control shared screens through teacher feedback, and control student collaboration functions. As you can see, we are fully committed to providing industry solutions that create engaging and collaborative experiences in diverse environments. Specifically, our feature-rich solution bundles provide integrated hardware and software partnered with professional development and training resources to drive adoption. With our tremendous foundation of talented management and outstanding solutions, we are fully committed to delivering strong financial performance in the fourth quarter and showing continued improvement in future quarters with a specific focus on revenue growth, increasing gross profit margins, and positive earnings. With that, I will now turn the call over to our CFO, Takesha Brown.

Thanks, Michael. As Michael noted, the company acquired 100% of the outstanding shares of Sahara on September 24, 2020. Included in the three-month and nine-month periods of 2020, as will be discussed are Sahara’s operating results for the period from September 25th through September 30th. Sahara contributed approximately $1.1 billion in revenue and approximately $0.1 million in gross profit. Sahara’s total operating expenses were $0.3 million, and they incurred a net loss of approximately $0.3 million. Sahara’s gross profit and net loss were negatively impacted by the purchase accounting impact of $0.2 million as a result of marking the inventory up to fair value at acquisition date. I will now review our third quarter 2020 consolidated results. Revenue for the three months ended September 30, 2020, was $9.5 million, a decrease of $1.8 million or 16%, compared to $11.3 million for the three months ended September 30, 2019. The decrease in revenues in 2020 is related to the reduction in sales of panel, software, and STEM, primarily attributable to the school closures as a result of the ongoing COVID-19 pandemic. Gross profit for the three months ended September 30, 2020, was $2 million, a decrease of $1.2 million, compared to $3.2 million for the three months ended September 30, 2019. The resulting gross margin was 21.4% for the three months ended September 30, 2020, compared to 28.6% for the same period in 2019. The decrease in gross margin was related to changes in the company’s product mix, with a reduction in higher-margin products such as software and STEM, a 33% increase in distributor sales compared to 2019, and a $0.2 million purchase accounting impact of marking the Sahara inventory up to fair value at acquisition date. General and administrative expenses for the three months ended September 30, 2020, were $3.3 million, compared to $4.2 million for the three months ended September 30, 2019. The decrease was primarily driven by reductions in compensation benefits of $0.7 million, travel and entertainment of $0.2 million, and stock compensation of $0.2 million. Research and development expenses for the three months ended September 30, 2020, were $0.5 million, compared to $0.4 million for the same period in 2019. The change in research and development expense is primarily driven by an increase in contract services related to software consulting. Operating loss for the three months ended September 30, 2020, was $1.8 million, a decrease of $0.4 million or 30%, compared to an operating loss of $1.4 million for the three months ended September 30, 2019. Other expense and income for the three months ended September 30, 2020, was an expense of $2.5 million, an increase of $3.4 million or 381%, compared to an income of $0.9 million for the same period in 2019. The increase in other expense was related to a change in fair value of derivatives liabilities of $1.6 million and a loss from settlement of Lind debt of $1.7 million. Net loss for the three months ended September 30, 2020, was $4.2 million, compared to a net loss of $0.5 million for the same period in 2019. The increase in the net loss was primarily driven by a decrease in gross profit and an increase in other expenses, offset by a decrease in operating expenses. The resulting EPS loss for the three months ended September 30, 2020, was $0.10 per diluted share, compared to $0.04 per diluted share for the same period in 2019. Adjusted EBITDA loss for the three months ended September 30, 2020, was $0.9 million, an increase of $0.4 million or 66%, compared to an adjusted EBITDA loss of $0.5 million for the three months ended September 30, 2019. Our financial results for the nine months ended September 30, 2020 were as follows: revenue for the nine months ended September 30, 2020, was $23 million, a decrease of $4.1 million or 15%, compared to $27.1 million for the nine months ended September 30, 2019. The decrease in revenue in 2020 is related to the reduction in sales of panel, projectors, software, and STEM, primarily attributable to school closures due to the ongoing COVID-19 pandemic. Gross profit for the nine months ended September 30, 2020, was $6.3 million, a decrease of $1.6 million, compared to $7.9 million for the nine months ended September 30, 2019. The resulting gross margin was 27.4% for the nine months ended September 30, 2020, compared to 29.1% for the same period in 2019. The gross margin decreased from 29% to 27% and was related to changes in the company’s product mix, with a reduction in higher-margin products such as software and STEM, a 15% increase in distributor sales compared to 2019, and a $0.2 million purchase accounting impact of marking the Sahara inventory up to fair value at acquisition date. General and administrative expenses for the nine months ended September 30, 2020, were $10.4 million, a decrease of $1.5 million or 12%, compared to $11.9 million for the same period in 2019. The decrease was driven primarily by reductions in trade shows of $0.3 million, contract services of $0.6 million, compensation and benefits of $0.4 million, and travel and entertainment of $0.4 million. Research and development expenses for the nine months ended September 30, 2020, were $1.1 million, an increase of 18% compared to $0.9 million for the nine months ended September 30, 2019. The increase was driven primarily by an increase in contract services for software consulting. Operating loss for the nine months ended September 30, 2020, was $5.2 million, compared to $4.9 million for the same period in 2019. Other expense for the nine months ended September 30, 2020, was an expense of $2.4 million, an increase of $0.8 million or 49%, compared to an expense of $1.6 million for the same period in 2019. The increase was related to a loss from settlement of Lind debt of $2.3 million, an increase in interest expense of $0.3 million, offset by a gain on the settlement of EDI accounts payable of $1.7 million and a decrease in the change in fair value of derivative liabilities of $0.3 million. Net loss for the nine months ended September 30, 2020, was $7.6 million, an increase of $1.1 million or 17%, compared to a net loss of $6.5 million for the same period in 2019. The resulting EPS loss for the nine months ended September 30, 2020, was $0.31 per diluted share, compared to $0.62 per diluted share for the same period in 2019. The increase in the net loss was primarily driven by a decrease in gross profit, an increase in other expenses, offset by a decrease in operating expenses. Adjusted EBITDA loss for the nine months ended 2020 was $1.6 million, a decrease of $1.5 million or 50%, compared to an adjusted EBITDA loss of $3.1 million for the nine months ended September 30, 2019. With that, we’ll open up the call for questions.

And first we’ll go to John Nobile with Taglich Brothers. Please go ahead.

Hi. Good afternoon, Mike and Takesha. Thanks for taking my questions. My first question, actually, I have a lot about the Sahara. I know that they have a portion of the sales to the corporate market. I was hoping you could kind of break out what percentage of Sahara’s sales are to the education market?

Yeah. John, thanks for joining the call and great question. So, we’re still going through the Sahara financial statements and we’re actually working to have their financials audited in preparation for filing 8-K in early December, which will include their standalone historical, as well as the pro forma combined statements with Boxlight. But historically, their corporate overreaching quarters, corporate businesses meant about 15% of the total sales and about 85% has been in education. So that’s kind of a rough number for you. It’s a little higher in the UK and then it’s a little lower throughout other parts of Europe.

Okay. So while the bulk obviously is education, but 15% corporate market, I’m just curious, being you’re really focused in on the education market, if you’d be looking to grow the corporate or the non-education market of Sahara’s business or you’re looking really to just focus on the education market?

Right now our focus primarily is education, but we do expect to grow the corporate market as well. We follow pretty closely a resource called FutureSource. They put together some research on the Interactive Flat Panel or Interactive Display market and we follow that pretty closely and we’re seeing an uptrend in interactive displays being sold into the corporate market. We’re about in line with that with the Sahara Group where I think that 15% of the total market today, but FutureSource is projecting that to increase pretty dramatically over the next few years. In fact, I believe that by 2024, we’re supposed to be upwards of almost 30% of total value and north of 20% in units. And so, I would expect before 15% today approximately within that group, I think we’re going to start to see that increase over the next few years. But again, overwhelmingly, our business will be education.

Okay. For Takesha, I was hoping to get an idea of what the blended gross margins will be with Sahara moving forward. Since you'll have a complete fourth quarter with Sahara, I know there were some factors in this quarter. Before the acquisition, we were looking at gross margins around 30%. So now, with Sahara, what would be a reasonable estimate for gross margins?

So the first thing from an adjusted perspective, we probably have a range of 25% to 30%, but one of the adjustments that I spoke about in my discussion today was related to the markup of the inventory to fair market value. As a part of purchase accounting, we had a markup of about $4 million to inventory. And only about $200,000 of that turned in the last six days of the quarter. So if we just take that run rate, we would anticipate about $3 million of that to reverse out during the fourth quarter, which is going to have a significant impact on our margin for the quarter. So on adjusted, it could be in a range from 15% to 20%.

But John that's just for the…

For Q4 2020?

Yes for Q4.

That’s for Q4.

Okay, so it’s not that far off from pre-acquisition margins then.

That is correct. Because, if you think about it, the largest majority of Sahara is going to be the panels, right, which is kind of in line with what it is that we’ve been experiencing in the Boxlight.

Okay, great. Thank you for that. I just have one final question, general question. If you could just kind of talk about the synergies that you expect from this acquisition of Sahara.

I believe the most significant synergies will come from new opportunities to increase revenue. By merging the companies, we are adding talented management, which is beneficial. Additionally, we are expanding our reach in other markets and integrating our product offerings to create top-notch solutions. We are seeing enhancements in both product lines. Ultimately, I expect to see increased revenue opportunities in both Europe and the U.S. as a result of this merger.

So, obviously, there are going to be some good cross-selling opportunities with that.

That’s right. Yes, I mean, just a couple quick examples. In Europe and Sahara, it’s been selling a great solution suite, but they haven’t had a core audio solution that we have on a course in MimioClarity, that’s something we’re going to look at potentially selling over into EMEA. On the flip side, there are some great assets, including interactive flat panels that Sahara sells. They have an Android app store, that’s something that we haven’t had. So that’s something we’re looking at adding to our displays under the Mimio Boxlight brand. And so there are a lot of things like that we’re looking at dozens of potential opportunities around the solution suite. And over the next couple of quarters, we’ll start to realize those benefits.

Next, we go to the line of Brian Kinstlinger with Alliance Global Partners. Please go ahead.

This is Jacob on for Brian. Thanks for taking my questions. You talked before about the corporate market. Is there ultimately a software play on that?

Absolutely. Every display we sell includes software. In the corporate market, we provide whiteboarding software designed for corporate use, which is essential. Additionally, the Sahara Group has acquired a company called Sedao, known for its digital signage solutions, which offers a significant amount of software within that group. Therefore, we have a substantial amount of software available for sale in the corporate market as part of our solution.

Okay. And can you talk about the progress you’re making on the Samsung partnership? And have they started to sell the bundle yet? And has this had any material impact on the results so far?

Yes, so it has not had a material impact at this point in time, but we expect to start seeing some business go through this quarter with a real focus on 2021. So I would just tell you that we’ve invested a tremendous amount of resources into the relationship as have they. And we’re just now to a point to where we can offer the solution and actually ship the solution, now agreements finalized, logistics is finalized, and now we’re turning our focus to sales and marketing. And we have a pretty big target for 2021, but I expect in 2020, in the fourth quarter, now that we’ll see a handful of units, but nothing ultra-substantial. But again, you’re going to see that the real uptick in 2021.

Okay and then a follow-up on Samsung. Is your plan to ultimately leverage Samsung partnership and use them as a supplier to Sahara as well?

That’s something we are considering. Currently, our agreement with Samsung is limited to the United States. Our main focus is on the U.S. at the moment, particularly on the bundle that includes their displays along with our software and training modules. We anticipate seeing a positive response in 2021 in terms of unit sales, and evaluating our options will come later. For now, our priority is to showcase that bundle in the U.S. and observe the outcomes.

Okay. And can we expect to continue seeing with the businesses combined some seasonality in the December and March quarters? And what kind of levels of seasonality do you think we would see?

Yes. So it’s going to be stabilized a little bit as we become more global because schools have different schedules internationally in some areas than they do here in the U.S. That being said, we still expect to see a lighter Q1 and then an uptick a little bit in Q2, Q3 is still going to be the strongest quarter, Q4 will be strong as well. But you got to expect to see Q1 lighter, and we’ll provide some more guidance on that as we start to stabilize our reporting internally.

Okay. And last one for me, what was the reason for the increase in distributor sales and something that you might see in future quarters?

The increase in distributor sales was because we entered into a new distribution agreement with D&H Distributing, which is a large $4.5 billion distributor here in the U.S. They have multiple logistics centers throughout the U.S. And they sell a tremendous amount of education. And we entered into that agreement for a couple of reasons. One, they had committed to carry inventory in their distribution centers. And then number two, they’ve committed a quick turnaround to ship if our partners that we sell through place orders with D&H, there’ll be a quick turnaround in inventory. So those were the main reasons. Beyond that, D&H has a large network of channel partners, some of which we don’t sell-through today in education, and we’d hope that we could start to gain access to some of those partners and I believe we’ll start to see that happen more. But that being said, there is a cost of selling through D&H distribution or through other distribution. And on average, it’s costing us from 2% to 5% depending on the orders that we place through them. And so we did see an uptick because we had a lot of our partners that chose to buy from D&H versus directly through us. And we’ve pushed some partners to D&H as a result of again providing a better service to our partner network. But we believe that over time, we can offset that a little bit with improving margins in other areas. But we did take a little bit of a hit last quarter with the shift of that business to distribution?

Next we go to the line of Jack Vander Aarde with Maxim Group. Please go ahead.

Hi, Michael. Hi, Takesha. Congrats on the quarter and the Sahara acquisition. Thanks for taking my questions. So, Michael, in your prepared remarks, you mentioned that you’re seeing increased demand in the fourth quarter, and you expect to generate revenue of at least $27 million along with positive adjusted EBITDA. I’m not sure if you provide this or if you feel comfortable providing this yet. But can you provide any more granularity on that $27 million plus revenue guide between maybe what you expect quarterbacks like versus Sahara? What that mix would be?

Yes, I can provide some insights. The $27 million figure was derived from several factors. Firstly, we considered the orders that have already shipped during the quarter. Secondly, we evaluated our backorders that we expect to sell. Lastly, we analyzed our weighted pipeline to determine what we realistically believe we can sell and deliver. We are confident in that $27 million figure. At this time, I can't specify the historical Boxlight figures versus those for Sahara since we don't track it that way anymore. Our focus now is on markets; we track the U.S. and EMEA markets separately. This means we will primarily be selling the Clevertouch brand, and many partners currently selling Mimio branded solutions will transition to this brand. In the U.S., we are concentrating on our Mimio K-12 brand, although some Clevertouch products will still be sold. Our main emphasis moving forward will be on the Mimio brand. By the end of the quarter, I should have more information to share, but it will mostly be market-based. Regarding the core Boxlight business, we are having an exceptional quarter, much stronger than the same time last year. We anticipate that our core business will outperform last year significantly. The industry as a whole is also experiencing a notable increase, with research from FutureSource indicating strong growth in interactive displays. They expect Q4 to be very strong, following a robust Q3 where global increases, excluding China, were around 11%. The U.S. alone also experienced an 11% increase compared to the same quarter last year, while EMEA saw an 8% growth. Despite the challenges posed by COVID and the adjustments schools are making, sales of interactive flat panels have increased compared to last year. While some of our contracts were affected, as we have become a larger global company, I foresee our performance aligning more closely with market trends in the future. FutureSource projects continued growth in the coming years, indicating that 2021 will exceed both 2020 and 2019, while 2019 and 2020 are expected to remain relatively flat. Overall, I believe we will see positive growth in both the U.S. and EMEA moving forward.

Got it, that’s helpful. A lot of added clarity there. I appreciate it. And then maybe if I look at Sahara’s 2019 financial statements and just do a rough conversion in U.S. dollars, their 2019 revenue looks like it was about $100 million USD. Can provide us any insight or any color on how Sahara’s revenue has tracked during 2020 relative to their 2019 numbers? Has revenue been up down flat given COVID and everything? I’ve had insight into that. So I wonder if you can provide any clarity there?

We are a bit cautious about sharing specific numbers at this stage since we are still completing the audit. Once that process is finished, we will release the pro forma statements both as standalone and combined. This will happen soon, as we will have the December figures shortly. I can say that performance has been quite strong. They have had a good year so far, an outstanding October, and we anticipate a robust fourth quarter. There hasn't been a significant decline in performance, and most markets are showing growth. Additionally, they have recorded strong gross profits that are actually slightly better than historical levels. As Takesha mentioned, we expect the combined gross profit to range from 25 to 30 points, potentially leaning towards the higher end due to the gross profit margin.

Got it. Okay, that’s helpful as well. And then maybe if I just back to like Boxlight core products, can you provide maybe a status update on MimioClarity and what your business expectations are from this product in terms of revenue, because I believe earlier in the year, a couple of quarters ago, you had initially planned for this to be like a 10% of revenue contributor before the launch was delayed because of COVID related issues. But any update on MimioClarity sales and revenue attribution?

Yes, so the delays on clarity, which we did have substantial delays, but those were on the manufacturing side, where we had a lot of complications trying to get that to market. Those are essentially largely behind us. And so we have a finished product, we’re actually piloting the product in several school districts as we speak, and it’s going quite well. We picked up our first sales during the quarter of that we sold about 300 units that were sold during the quarter, I still think that 10% or even potentially something north of that is very possible for that solution and a tight margin. And so I think, Q4 is going to be a good quarter for us to be able to give you another update after Q4 of what we sold of that audio solution, but we stand behind it, I believe it’s the best in the market. And we think that we’re going to have a really good attachment to the displays that we sell, of selling that audio solution as well.

Got it. And then just one more question for me. Can you talk about your — just as it relates to your overall customer base and be what percentage you would say have already purchased a Boxlight virtual hybrid learning solution from you, which I believe would be considered your MimioConnect offering? What would you say your overall penetration is of your existing customer base and what’s left for the remaining opportunity to sell the MimioConnect offering?

We are very optimistic about the platform; it’s fantastic. I don’t think there is a better platform available. It was specifically designed to meet the needs of today's hybrid environments, as well as virtual and traditional setups. It caters to all types of environments. That being said, we are still in the early stages since we just recently launched the platform. We've been demonstrating it and although we don’t have any large implementations to reference yet, it is being utilized in several districts. We expect to see more usage soon. Additionally, we are offering districts that purchase panels a trial period for MimioConnect, giving them an opportunity to test and use it. We are also just beginning to roll out marketing efforts. I think that in Q4 and Q1, we will start to see some positive adoption. However, up to this point, we don’t have any significant deployments of Connect; there are several potential opportunities in progress, but we cannot announce any at this moment.

Okay, great. Thank you, Michael. I appreciate the added color and look forward to what Q4 and beyond brings to the Boxlight store. That’s it for me. Thanks.

Thanks, Jack.

Our next question or comment comes from the line of Allen Klee with National Securities. Please go ahead.

Hi, this might be a definitional question. But you’re guiding to $27 million plus of revenue, but you said your orders increased to 9.3. And your backlog is 9.7. Those numbers sound kind of low to be estimating $27 million plus of revenue. Could you explain that a little more?

The order figures you mentioned are from last quarter, specifically the Q3 orders. Therefore, they are not relevant to the guidance we are providing for Q4. The back orders represent previous figures, and we anticipate that most, if not all, will be fulfilled within Q4. When we estimate our Q4 numbers, the first factor is those back orders, and we already have a significant portion of that fulfilled. The second factor is the new orders that have been placed during the quarter that we are able to process. The third factor is our sales pipeline. Together, these elements lead us to guide towards $27 million. We have conducted extensive diligence on Sahara's historical pipeline and their performance against forecasts, and we feel very confident about the current figures. However, to be clear, the only relevant figure among these elements is the backlog that will be fulfilled in Q4.

Okay, would you know what your amortization expense run rate and depreciation would be going forward?

We’re still working on finalizing the purchase accounting. We have of course, so long to kind of finalize that since we closed the acquisition on December 24. So we have not yet finalized that, but once we get that number finalized. Once we get those balances finalized, we’ll be better able to provide an amortization amount. From a depreciation perspective, we have minimal PPE both Boxlight and Sahara. So there’s not going to be much of a change there, but the bigger change is going to be related to the intangibles that have been identified for the Sahara acquisition.

Okay, if I look at the historical financials that are available on Sahara, and I realized they’re not GAAP, so you have to take them with a grain of salt. But is there any reason to think that those type of bottom line numbers are somewhere in the range of time of where the run rate could be for their Boxlight user?

I believe you’re generally safe on that. We’re not making significant changes to their business. However, be cautious if you’re trying to calculate the net income, as there may be factors from the purchase accounting that could affect it. We are reluctant to comment on a net income figure since we don’t know what the amortization will be or if there will be other impacts from the purchase accounting. That said, if you’re considering the adjusted EBITDA, we are very confident that it will align with what you would derive from their figures, based on historical data.

Next, we go to the line of Howard Schwartz with Microcap Headlines. Please go ahead.

Hello, Michael and hello, Takesha. I tip my hat to the recent I consider blockbuster news announcements over the last several months. So I want to start with that. Now, the Sahara acquisition what were the terms of the preferred stock? Is it convertible, correct?

That’s right, Howard. So the preferred stock is convertible. The price was set the day after the acquisition, which ended up being $1.66. So all of that preferred stock is convertible at $1.66. Now is redeemable meaning, of course, the company could pay off every preferred second at any point in time prior to the conversion. And then there is only convertible after there was $10 million pounds in Series C and $12 million pounds in Series B convertible preferred. The Series B is convertible after 2024. And the Series C is convertible after 2026. So my point is, we have a long time before that potentially could convert, and then between now and then it’s redeemable if it is allowed to convert at some point in the future right after those dates. It’s $1.66. That’s the conversion price. And there is a leak provision where they can hit the market all at the same time.

But $1.66 is the absolute set price, correct?

That’s right. Obviously, $1.66. Yes.

Okay, so currently there are approximately 50 million shares total outstanding. Is that fully diluted considering the preferred stock conversion?

Yes, there are about 51 million shares outstanding, yes. But it’s only going to take into account a portion of the preferred. Takesha, do you want to speak to that?

Yes. So, currently, we have about 51.2 million shares outstanding. Then we also have the Lind convertible debt, which is about $24 million on the balance sheet right now. We amortize that monthly over two years, and we pay it utilizing stock. There’s a stock or cash option we can pay it using stock. And there’s a 10% discount and a 20-day look back on that. So, we have that as well in addition to the preferred stock that Michael talked about previously.

Yes, so you got 51 million shares approximately outstanding, you got about $24 million in the convertible notes to Lind Partners, and they got about $29 million in preferred stock. So depending on how you look at that, again, the convertible notes amortize over two years, we’re on the early end of that. And so, we could elect to pay that off with cash if we wanted to which in that case, it wouldn’t be dilutive or same thing with the preferred if we were deemed the preferred at some point we wouldn’t be as dilutive or if we were to do an equity raise in the future and we have multiple years to address that perhaps not be dilutive, but you’ll have to run your own calculations on that.

Right, but there are no toxic provisions with Lind Partners or the preferred.

No. The payments to Lind Partners are structured over two years with monthly payments, which can be made in stock or cash at our discretion. I don’t think it would qualify as toxic. Additionally, the recent $22 million we raised is convertible at $3.50, so if the stock price exceeds that, it could convert at that rate. I should also point out that our cost of capital is quite low, with a low-interest rate, resulting in a total cost in the low teens when considering the original issue discount and the annual percentage rate.

Right. All right, so I mean, to me it looks like with approximately $44 million in shareholders’ equity, what’s total outstanding, your book value is about $0.90 a share. So you’re trading right now on two times book and trading on one times revenue with the current price of the stock. I mean, at $2 you’d only be trading at one times of revenue.

How are you…

I am just making the statement.

How are you? It seems like a good entry point. We believe in this. We’ve come a long way. Those of you…

Yes, I am just…

…have been following the last few months…

This concludes our question-and-answer session. We return to Michael Pope for closing remarks.

Thank you everyone for joining the call. Thanks for your support. And we look forward to speaking with you again in March when we report our fourth quarter results.

Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.