Boxlight Stock: Upgrade to Buy on Acquisition and Orientation (NASDAQ:BOXL)

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To note:

I covered Boxlight Corporation (NASDAQ:BOXL) previously, so investors should consider this as an update to my previous articles on the society.

On Thursdays, Boxlight Corporation or “Boxlight” reported mixed results in the fourth quarter as sales exceeded expectations while profitability was impacted by ongoing supply chain disruptions and one-time costs associated with the recent acquisition of FrontRow Calypso (“FrontRow”) and repayment of inherited debt.

On a more positive note, management raised 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 l last year.

Adjusted for an expected revenue contribution of $32 million from FrontRow, organic growth is estimated at approximately 18%.

While FrontRow is expected to grow at a slower pace, the business is highly profitable, as evidenced by the 25% Adjusted EBITDA margin forecast for the FrontRow segment this year and gross margins above 50% achieved in 2021 .

As a result, the consolidated gross margin should experience strong growth this year. On the conference call, management outlined medium-term expectations for gross margins to increase above 30% with a long-term target of “closer to 40%”.

Even better, management was forecasting positive cash flow for the year, which would be quite an accomplishment given the ongoing supply chain disruptions and significant obligations under 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 term credit facility of up to $68.5 million dollars, dated December 31, 2021 (the “Credit Agreement”), with Whitehawk Finance LLC, as lender (the “Lender”), and White Hawk Capital Partners, LP, as collateral agent.

Pursuant to the Credit Agreement, the Company received an initial term loan of $58.5 million on December 31, 2021 (the “Original Loan”) and secured a subsequent deferred draw facility of up to $10 million which may be provided for working capital purposes under certain conditions (the “Deferred Drawdown”). The Initial Loan and the Deferred Drawdown are collectively referred to as the “Term Loans”. Proceeds from the initial loan were used to fund the company’s acquisition of FrontRow, repay all debts owed to our existing lenders, Sallyport Commercial Finance, LLC and Lind Global Asset Management, LLC, pay related fees and transaction, and provide working capital. Of the original loan, $8.5 million is repayable on February 28, 2022, with quarterly interest payments commencing March 31, 2022 and the remaining balance of $50.0 million plus any deferred draw loans becoming due and payable in full on December 31, 2025.

The term loans will bear interest at LIBOR plus 10.75%; provided that after June 30, 2022, if the principal leverage ratio of the company (as defined in the credit agreement) is less than 2.25, the interest rate would be reduced to LIBOR plus 10.25 %. These conditions are subject to the Company maintaining a borrowing base under conditions consistent with the credit agreement.

Additionally, WhiteHawk managed to extract:

  1. 528,169 million new ordinary shares
  2. Dilution protected warrants to purchase an additional 2,043,291 common shares at an exercise price of $2. The strike price will be reset to a significantly lower level on March 31.”based on volume-weighted arithmetic average prices for the 30 trading days preceding March 31, 2022
  3. Huge fee of $1.76 million
  4. An initial issuer discount of $0.5 million

Even without taking into account 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 balance under the facility of $55 million, Boxlight would be expected to incur nearly $6.5 million in annual interest expense.

On the other hand, the new credit facility allowed the company to repay the remaining toxic convertible notes issued to Lind Global Asset Management LLC (“Lind Global”) to partially fund the acquisition of Sahara Presentation Systems (“Sahara”) in 2020.

Also keep in mind that the company still has to process 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 the year. last.

Although the company hasn’t filed its 10-K yet, I’m guessing the company got an extension.

Conclusion:

After a disappointing second half of 2021, Boxlight management expects respectable organic growth and greatly improved profitability for this year. In particular, the recent acquisition of FrontRow Calypso appears to be an excellent move as the transaction will increase margins by several hundred basis points and supports management’s expectations of positive cash flow for the year.

While the first quarter forecast of $44 million in sales and an adjusted EBITDA of $2 million is nothing out of the ordinary, business is expected to pick up significantly in the second quarter and particularly in the third quarter, which has always been the company’s strongest quarter.

Should Boxlight meet or even surpass profitability targets, I would expect the stock price to return above the $2 level.

Speculative investors willing to give management the benefit of the doubt should consider raising the stock to current depressed levels.

Given the improved outlook and updated valuation, I am raising my rating on which stocks to “buy”.

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