Boxlight Corporation
Q1 2020 Earnings Call Transcript

Published: 18 May 2020

[Operator:]

Thank you, and welcome to the Boxlight Full-Year 2019 and First Quarter 2020 Earnings Conference Call. By now, everyone should have access to the full-year 2019 earnings press release, issued on May 12, and the first quarter 2020 press release, issued on May 15. The call is being webcast and is available for replay.The remarks today will include statements that are considered forward-looking within the meaning of securities laws, including forward-looking statements about future results of operations, business strategies and plans, customer relationships, market trends, and potential growth opportunity. 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 in 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 release, which will be posted on the Investor Relations section of the company's Web site, at investors.boxlight.com.And with that, I'll hand the call over to Boxlight's Chief Executive Officer, Michael Pope.

[Michael Pope:]

Good morning, everyone. Thank you for joining the call. I'd like to especially thank our shareholders, partners, and customers for their confidence and support during this critical time as a company. We've gone through significant transitions since our 2016 merger of Mimio and the Boxlight Group, and our subsequent IPO in 2017. Since that time, we have attracted a tremendous management team, assembled a global channel partner network, closed the acquisitions of Cohuba, Qwizdom, EOS Education, Modern Robotics, Robo3d and MyStemKits, continued to innovate with award-winning products and services, consolidated our operations and supply chain, and organized our systems and accounting under one ERP system. We are proud of our progress, and I believe we are well positioned as a company for future growth.We had a slower than expected fourth quarter, but we are pleased with our progress during the first quarter. For Q1 2020, we reported that revenues increased by 15%, to $5.7 million, and orders increased by 85%, to $7.6 million over the same period in 2019. Additionally, our adjusted EBITDA loss improved by 41%, to $1 million, and our adjusted EPS improved by 51%, to a loss a $0.08. Our CFO, Takesha Brown, will provide more financial details shortly. During the quarter, we delivered on several key contracts, including San Diego Unified, in California, Montgomery County, Maryland, Jefferson County, in Colorado, Frederick County, in Maryland, and Penn Manor, in Pennsylvania. We were also selected by Shelby County Schools, in Tennessee, and Netherland Independent School District, in Texas for our interactive displays, and by Union County Public Schools, in North Carolina for our Mimio MyBot robotics and coding system.During the first quarter, we introduced new channel partners, including JB&A as a national partner, [indiscernible] in Texas, and [CT] [Ph] International in Mexico. We continue to win opportunities with strong partners, including Trox, Howard Technology Solutions, CDWG, Visual Techniques, DHE Computer Systems, Central Knox, and Digital Age Technology, among others. In March, we entered into an agreement with D&H Distributing, a 100-year-old technology distributor with warehouses across the U.S. and Canada. We expect this distribution relationship will allow us to better meet the needs of our reseller channel.During the quarter, we announced that Dan Leis had accepted the position as Senior Vice President of Global Sales and Marketing. With more than 25 years of experience, Dan is an accomplished business leader with global experience in sales and marketing. He previously led Boxlight's Global Services business unit, which more than doubled in size in 2019. We also appointed Ryan Legudi as Senior Vice President of STEM Solutions, and Braydon Moreno as Director of STEM Solutions. Ryan and Braydon previously led Robo3d and MyStemKits, and now head our Global STEM Strategy.Although the education industry is experiencing a transition, our company, mission, and vision have not changed. We are committed to become the leader of innovative and effective educational technology solutions. We aim to improve learning and engagement in classrooms, and help educators enhance student outcomes and build essential skills. We understand that we must be nimble, and flexible, and innovative to meet the demands for today's evolving education requirements. Today's educational environment provides additional challenges with the COVID-19 crisis, and the complications of distance learning, and the added safety concerns for students and educators.Throughout the U.S. and many countries globally, schools have shifted to a digital learning environment for the remainder of this current school year. Although some school systems have announced they will not return to the classroom in the fall, we believe most K-12 school systems will return with modified schedules and physical safety measures. Many will also adopt a hybrid of both in-class and distance learning. The initial data from digital learning has been concerning, reporting widening achievement gaps, especially for underprepared and disadvantaged students. Additionally, many students do not have access to digital devices or reliable internet access. As parents and guardians return to work, distance learning also presents logistical complications with students remaining home.Educators need effective strategies, technology solutions, professional development, and training as they navigate this new environment and determine their approach to meet safety and educational needs. Our solutions suite includes software tools for both in-class and distance instruction. We also offer significant professional development resources, including customized consulting, educator courses, and certifications to assist education systems in their distance learning or blended learning initiatives. We recently released a collection of multimedia resources to train K-12 teachers on tools to deliver distance learning during closures.We offer a series of live webinars, self-paced online professional development courses, and access to our team of digital learning specialists for personalized support. Since mid March, we provided virtual professional development sessions to nearly 9,000 educators, including 1,200 for webinars, 3,800 for labs and playgrounds, and nearly 1,400 for one-on-one coaching sessions, and nearly 2,000 for online courses. I accepted the CEO role, on March 20 this year, at an unprecedented time. We began working from home as a company, and that same week, due to COVID-19 which was escalating, we had reported historical operating losses and struggled with a limited balance sheet and declining stock price.As an executive team, we agreed that we were at a point where we had to make some immediate difficult decisions. That first week we budgeted to reduce our annual operating expenses by $5 million, including a reduction in our annual payroll expense by over $2 million, or a 30% reduction in our staff. Although a difficult decision, we believe it was necessary to put us on a more conservative path to positive cash flow and profitability. The payroll reductions were largely to administrative and supportive roles, and we believe our sales targets are still intact.We also expect to rise additional debt or equity capital this year to reduce our payables, increase our inventory levels, and provide a working capital buffer. The combination of our reduced operating budget, run rate sales forecast, and plans for additional investment will position us for significant financial improvement including plans to operate on a cash flow positive basis and be financially self-sufficient.We continue to commit to diversified product mix and improving gross profit margins. During 2019, over 50% of our sales were interactive flat panels. We expect 2020 to show a double-digit dollar improvement in sales from other product categories including classroom accessories such as our MimioClarity distributed audio system, software solutions with a focus on recurring subscription revenues, STEM education solutions with training and standards based content and professional services.Last month we closed on acquisition of Robo3D, a leading brand of 3D printers; and MyStemKits, the largest online collections of K-12 STEM curriculum for 3D printing. In addition to 3D printing solutions, our STEM education portfolio also includes our MyBot robotics and programming system, the Labdisc Portable STEM Lab, our MimioView document camera, and STEM specific curriculum and professional development.We expect our STEM education division will be a tremendous growth and profit center while empowering today's students with hands-on learning to prepare them for beyond the classroom. We are also focused on broadening on our geographic footprint with a particular focus on Europe and Latin America. Both markets grew in 2019 and we expect continued growth in our international markets in 2020.With that, I will now turn the call over to our CFO, Takesha Brown.

[Takesha Brown:]

Thanks, Michael. I'll now review our fourth quarter 2019 results. Revenue for the three months ended December 31, 2019, was $5.3 million; a decrease of $6.7 million or 56% compared to $12 million for the three months ended December 31, 2018. The decrease is primarily attributable to fourth quarter of 2018 revenue including $4.6 million of previously deferred revenue related to a large Clayton County contract.In addition, the company adopted the new revenue recognition guidance, ASC Topic 606 which resulted in a year-to-date adjustment of $0.6 million that was recorded in the fourth quarter of 2019. Gross profit for the three months ended December 31, 2019 was $0.7 million; a decrease of $2.3 million compared to $3 million for the three months ended December 31, 2018. Resulting gross margin was 12.6% for the three months ended December 31, 2019 compared to 25.2% for the three months ended December 31, 2018.The decline is gross profit was primarily related to the year-to-date revenue adjustment of $0.6 million related to ASC Topic 606 adoption and an increase in customs expense of $0.2 million. General and administrative expenses for the three months ended December 31, 2019, was $3.9 million; relatively flat compared to $3.8 million for the three months ended December 31, 2018. Research and development expenses for the three months ended December 31, 2019, was $0.3 million, flat compared to three months ended December 31, 2018.Operating loss for the three months ended December 31, 2019 was $3.5 million; an increase of $2.4 million or 224% compared to $1.1 million for the three months ended December 31, 2018. Net loss for the three months ended December 31, 2019 was $3.3 million; an increase of $2.7 million or 448% compared to $0.6 million for the three months ended December 31, 2018. The resulting ESP loss for the three months ended December 31, 2019 was $0.29 per diluted share compared to $0.6 per diluted share for the three months ended December 31, 2018. The increase in net loss is primarily due to decreased revenue and an increase in operating expense as a percentage of revenue. Adjusted EBITDA loss for the three months ended December 31, 2019 was $3.1 million; an increase of $2.7 million or 710%, compared to $0.4 million for the three months ended December 31, 2018.Next, our financial results for the year ended December 31, 2019 were as follows. Revenue for the year-end December 31, 2019 was $33 million, a decrease of $4.8 million or 13%, compared to $37.8 million for the year ended December 31, 2018. Gross profit for the year ended December 31, 2019 was $8.9 million, an increase of $0.2 million, compared to $8.7 million for the year ended December 31, 2018. The results in gross margin was 27.1% for the year ended December 31, 2019, compared to 22.9% for the year ended December 31, 2018.General and administrative expenses for the year-end, December 31, 2019 was $15.8 million, an increase of $0.8 million or 5%, compared to $15 million for the year ended December 31, 2018. The increase was primarily driven by increase in payroll costs.Research and development expenses for the year ended. December 31, 2019 was $1.2 million, an increase of $0.5 million or 83%, compared to $0.7 million for the year ended December 31, 2018. The increase in research and development expense was related to contract services for software consultants and salaries.Operating loss for the year ended December 31, 2019 was $8.1 million, an increase of $1.1 million or 15%, compared to $7 million for the year ended December 31, 2018. Net loss for the year ended December 31, 2019 was $9.4 million, an increase of $2.2 million or 31%, compared to $7.2 million for the year ended December 31, 2018. The resulting EPS loss for the year ended December 31, 2019 was $0.88 per diluted share, compared to $0.72 per diluted share for the year ended December 31, 2018. The increase in net loss was primarily due to decreased revenue, increase in operating expense as a percentage of revenue and increase in interest expense.Adjusted EBITDA loss for the year ended December 31, 2019 was $5.9 million, an increase of $2 million or 49%, compared to $3.9 million for the year ended December 31, 2018. Our financial results for the three months ended March 31, 2020 were as follows. Revenue for the three months ended March 31, 2020 was $5.7 million, an increase of $0.7 million or 15%, compared to $5 million for the three months ended March 31, 2019. The revenue grows reflect increased volume related to U.S. panel sales.Gross profit for the three months ended March 31, 2020 was $1.6 million a decrease of $0.1 million, compared to $1.7 million for the three months ended March 31, 2019. The results in gross margin was 27.8% for the three months ended March 31, 2020, compared to $33.4 for the three months ended March 31, 2019. The decrease in gross profit was primarily driven by customized pricing on competitive bids for flat panel.General and administrative expenses for the three months ended March 31, 2020 was $3.9 million relatively flat, compared to $3.8 million for the three months ended March 31, 2019. Research and development expenses for the three months ended March 31, 2020 was $0.3 million, an increase of $0.1 million for 34%, compared to $0.2 million for the three months ended March 31, 2019. The increase is related to contract services for software consultant.Operating loss for the three months ended March 31, 2020 was $2.7 million, an increase of $0.4 million or 14%, compared to $2.3 million for the three months ended March 31, 2019. Net loss for the three months ended March 31, 2020 was $1.9 million, a decrease of $2.7 million or 58% compared to 4.6 million for the three months ended March 31, 2019. The result in EPS loss for the three months ended March 31, 2020 was $0.16 per diluted share, compared to $0.45 per diluted share for the three months ended March 31, 2019. A decrease in the net loss was primarily due to increased revenue, a decrease in operating expense as a percent of revenue, change in fair value of derivative liabilities, and gain on settlement of outstanding debt. Adjusted EBITDA loss for the three months ended March 31, 2020, was $1 million, a decrease of $800,000 or 41% compared to $1.8 million for the three months ended March 31, 2019.With that, we'll open up the call for questions.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] And our first question we take from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

[Brian Kinstlinger:]

Hey. I got a bunch. I'll ask a few and then I'll get back in the queue. Historically your tech has been for the classroom, like you said. In your portfolio of technology where are you seeing the most demand, given the move to iLearning?

[Michael Pope:]

That's a good question, Brian. I think initially my response would be that we think there's still going to be a large demand for in-classroom technology. We don't think that that demand is going to slow much. We're expecting when schools go back, in the fall, which we think the majority will, although we're watching the data like everybody, that there's going to be a place for the classroom. However there will be added distance in digital learning, and so there's an added opportunity there to provide additional tools, and we're absolutely looking at that, and there's really two areas. Number one is software. Schools need software that's going to work for both in classroom and at home, and so we have software that works in that manner, but we're actually developing additional software that we hope to launch in the near future that will be -- will provide additional tools. And then secondly, there needs to be a tremendous amount of training and professional development. Educators are not -- they're not currently trained on how to work in this environment, and they need education themselves on how to be successful in this new environment, and we have a lot of tools around that that we can help educators, starting at the school district level, put a plan in place for distance or hybrid learning in class and out of class, as well as training individual teachers on how to be effective in their classrooms.

[Brian Kinstlinger:]

Great, and then you really didn't say how COVID-19 is impacting revenue. You said that your goals are still the same, but have you seen pressure on orders or even shipments and past orders from late March to May, what have the trends been like, and should we expect that 2020, like many other companies, are going to be a challenge to grow revenue year-over-year?

[Michael Pope:]

Yes, so we're still figuring out ourselves, Brian, right. We're seeing what's happening, and we're monitoring on a daily basis what's happening in the education community. We do think there's going to be some slowdown. We haven't quantified it at this point, but we think that there will be some slowdown in the industry, and then I think also for us as a company, but I don't think it'll be dramatic. I think we're looking at probably flat line versus last year is our preliminary assessment. But we hope to put out some more guidance as time goes on. I would add there's still a lot of money out there for ed tech, right. Budgets generally haven't shrunk. And there's actually been new funding too that's come from the federal government and other sources to help provide additional assistance with the current environment. There has been a shifting in what solutions schools are buying. And that to some extent does affect, right. Our largest piece of sales come from interactive flat panels, and if schools are looking at more distance learning tools then funds may be diverted from classroom-specific technologies to technologies that work over distance environment. So we're monitoring that, but I would say for the year, probably some slow, but we don't believe it'll be dramatic.

[Brian Kinstlinger:]

Can you just still comment on what order and/or revenue has looked like from late March to May, I mean most companies have commented on the pressure they've seen. Maybe you can talk about those trends that you've seen in the short-term?

[Michael Pope:]

Yes, so I would say for our business it's a little bit different than if we were, say, a consumer products company or something, right, where the order comes in immediately. Our sales cycle is a long sales cycle. And so as result of having a longer sales cycle we actually didn't see a dramatic slowdown when COVID-19 first hit because we had a lot of orders in the works, and we've still been shipping orders. And so I would say we haven't seen a dramatic slowdown yet, but we think that that could kick in over the next few months. So I would say we're still on pace as of now. I would say flat with last year as of now, but the future is going to be more telling to us over the next several weeks and couple of months.

[Brian Kinstlinger:]

Great. And then I get your mix can change the gross profit percentage in dollars dramatically, but can you talk about with your cuts what overhead looks like so we can see what kind of gross profit gets you to profitability?

[Michael Pope:]

Yes, so what we mentioned on the commentary was that our operating budget over 2019, which you can pull OpEx expenses from '19, we reduced our OpEx expenses by about $5 million in our budget. So if you take that, reduce it by $5 million. That gives you a baseline there. And then that includes payroll. We reduced payroll by about $2,000 in annual expense, and then [indiscernible] we expect to be 30%-plus for the year. That's our figure. We mentioned that last year, and we hope that we could start to grow that, but the expectation -- even though Q1 came in below that, the expectation for the year that we would be a minimum 30% gross profit margin.

[Brian Kinstlinger:]

Great. Last I have for now. Although it's a long time ago it seems, you mentioned the year-over-year numbers for revenue in the December quarter were down because of a strong 2018, but if I recall, you were expecting significant growth, and growth to accelerate over the course of 2019, that didn't materialize. And some of that may have been New York City that you thought would be a big driver. So without commenting year-over-year what happened, what happened in the fourth quarter the numbers were so much lower than I think you guys were voicing a long time ago?

[Michael Pope:]

Yes, so I would say Q4 was definitely slower than expected. We had a large pipeline that we thought that we would close a much bigger sales figure, and it didn't happen the way we thought. I would say we were probably a little overaggressive too on our forecast for Q4. And some of that was related to us having such a strong Q4 in 2018, but when you look at it with hindsight, I think it's maybe not as bad as at first glance, and I would point to a couple things. Number one, our orders, if you look at orders for Q4 '19 versus Q4 '18 they were flat. So of course the orders come in prior to delivery, but that's an indicator, and I think the other thing that's interesting to note is that we began Q4 of '18, you'll remember, Brian, back then that we had a large deferred revenue number. It was actually $5.7 million that we began Q4 of '18 with, and then we also began Q4 of '18 with $4 million of backorders. We had about $10 million in the hopper going into Q4, versus going into Q4 '19 we had about $2 million. So we had a kind of a slower start. So I think some of which is over-optimism by management, and that's not something we plan to repeat. And them some of it was the fact that we thought that we were going to close some larger opportunities that did not close in the timeframe we expected.

[Brian Kinstlinger:]

Great, thanks so much.

[Michael Pope:]

Yes, great questions. Thank you, Brian.

[Operator:]

Next, we go to John Nobile with Taglich Brothers. Please go ahead.

[John Nobile:]

Hi, good morning, Mike and Takesha. And thanks for taking my questions on this call. I just wondered, I know you were speaking about, in light of all the school closures going to online learning, you're looking to really boost your software in this area and in-class training, but you have a Boxlight Together program, so I just wanted to get some clarification on that. I think it's offered for free, but my question really is, is it possible to monetize that program, your Boxlight Together program?

[Michael Pope:]

The answer is yes. So we offer free resources, absolutely, to get school districts and principals and educators in the door and give them some initial training, right, and some initial content, but the goal would be to then convert those two longer-term and high-value high-margin professional development customers. So that's the plan with that, and I should say twofold, it wasn't the only plan, right. So one plan was, hey, we really wanted to give back to the education community so we provided that campaign for that, but secondarily, yes, we want to convert those into revenue-paying school districts.

[John Nobile:]

Okay, and I don't know if I need to bring this up or not, I think it was the assumption that the Clarity startup issues were going to be not really an issue, but I just wanted to make sure those that -- it adversely impacted your 2019 results, I remember in the last conference call that was brought up as far as those startup issues, but are those Clarity issues behind you now, or are there anything else that might be lingering in regard to that?

[Michael Pope:]

Yes, it's a good question, John. So, we still had some additional issues with getting Clarity fully launched. We are delivering Clarity now, but we have had some slowdowns in the manufacturing process, which are result of COVID-19. Those are getting finalized as we speak, and we think we'll be at a point where we can fully go out and market and sell that solution next quarter. So, it's been a little disappointing. It's a great solution. In fact, we think it competes with any other solution in the marketplace and it fulfills a real need, but it's been a little bit frustrating the fact that it's taken us longer than expected to get that launched and fully operational.

[John Nobile:]

Okay. Well, thanks for that information, and I know at least last I checked there were robust growth projections for the educational robot market, I was hoping that you could talk a little about your business in that market since your acquisition of Modern Robotics in 2019, and your outlook for 2020, I preface that by saying not just 2020, but beyond assuming that school systems return to normalcy in the near-term by the fall things are back like you had mentioned earlier, a lot of kids are going back to the actual schools themselves and not learning from home. So, I was hoping just to get your take on that how the Modern Robotics acquisition might play into your 2019 and -- I mean, excuse me, 2020 and beyond numbers?

[Michael Pope:]

Yes. So, the answer is it absolutely plan to. We've talked a lot about STEM education and there needing to be a provider of a comprehensive STEM solution, and we aim to be that provider, and you'll see that we've continued to invest in STEM, right. Robotics and programming is one of those areas within STEM, but you also saw that we recently bought the Robo3d and MyStemKits company, which comes with a 3D printing solution, which is another foundational technology for STEM education, and then also we appointed Ryan Legudi as the Head of our STEM solution, and so Ryan, he's been on the job for about a month, so he hasn't been there very long, but he's working on a more comprehensive solution offering for STEM education, he's going to lead us over the next several months to make sure that we can see some tremendous growth with STEM solutions, but back on robots -- on the MyBot, absolutely our MyBot solution is part of that, and we think that there can be tremendous adoption. I would say for last year, it was a little slower than expected, ramping up. Some of that was making sure that we had the marketing right. Some of that was making sure we had content and lesson plans that were tied to standards, that kind of thing, but we've made a lot of improvement there to where we have a solution that's more fully baked now, and we have a great team and some added salespeople that are STEM-specific out there selling, and so I think that in the next couple quarters you're going to see growth, and we'll start to eat into that large market for robotics and programming.

[John Nobile:]

Okay, and in regard to the Robo3d and MyStemKits acquisition, I was just curious because I know in the press release it wasn't mentioned as far as type of revenue that might have been generated, so I don't know if I should be of the assumption that it wasn't really that significant in 2019, or do you have those actual numbers for 2019 from these two companies?

[Michael Pope:]

So we didn't report that, but I'll tell you, trailing 12-months for the two companies was about a $1.5 million in revenue. So it wasn't substantial, but it was significant, right, a $1.5 million in 3D printing solution to education is significant, and they were selling through a lot of our same channel partners that we sell through, like Trox and Howard, and some of these names that we've mentioned before, and so, there was an easy tie in there, and then also the idea that that team that was selling successfully 3D printing solutions could also sell our broader STEM suite, which of course includes like I said, the robotic solution, but also our lab desk and our Mimio View and some other items. I think that's an easy progression to have them sell a broader STEM solution suite. So, I would think that added solution suite with additional resources from our company would show that over the next 12 months, hopefully we're significantly higher than that $1.5 million that team was generating.

[John Nobile:]

Okay. Well, that's good to hear. Thanks for that input. Just one final question, I'll open up for others. One of the press releases, you said that you would be supplying an additional 150 panels to the Netherland Texas School System by 2023. I was hoping you could comment on how much revenue you expect that to generate, and if you believe that could lead to more Boxlight technology being used in that district, given, I think it was mentioned $151 million bond passed to further the use of new technology. So I'm just curious what you're seeing from that school district in regard to this?

[Michael Pope:]

Yes. So, I think the important question there is what additional opportunities we could see of course in that school district, but all of the school districts that we step into, right. We're not always going in with a fully comprehensive solution for every single classroom in the district. Sometimes it's a slower rollout, or it may be pilot, or it may be a smaller subset, and I would say the answer is in every case, if we start with just a handful of panels, our goal is to go in and try to put panels in every classroom, but also absolutely, we're talking about professional development and we're talking about STEM solutions, and we're talking about other accessories like our audio distribution system and others, and so, the answer is, I believe there's opportunity there. I don't have an exact revenue figure for that. I don't think Takesha would either. We'd have to pull that for you, but I would say that there is absolutely an opportunity to grow that, and if you wanted to do some rough math, revenue per panel is going to be a couple thousand dollars per panel. So, you can multiply that times the number of panels we mentioned in the press release.

[John Nobile:]

Okay, I appreciate that input. I'll open it up for others in the queue.

[Operator:]

Next we go to Allen Klee with National Securities. Please go ahead.

[Allen Klee:]

Yes, hello. You mentioned that you have back orders of $7.6 million. Can you remind us of when you have back orders is there a rule of thumb for how long it takes for that to get recognized as revenue?

[Takesha Brown:]

This is Takesha. Typically, with our back orders, they usually turn pretty quickly in the quarter, depending on the availability of inventory, and one of the things that Mike mentioned is that we're in a pretty good place now we haven't had any issues with getting our inventory from China due to the COVID. So, that's working on our behalf. So pretty much the majority of what's in our backlog should turn within the quarter.

[Allen Klee:]

Thank you, and then the only other question I have is, can you -- would we expect seasonality upon among quarters to be what it's been historically, or because of what we're going through to think of it maybe a little differently this year?

[Takesha Brown:]

I think the base of it, I'm sorry --

[Michael Pope:]

You go ahead, Takesha.

[Takesha Brown:]

I think the base of it will pretty much be the same. However, as Michael mentioned earlier, we may see some slowing in Q2, because of the change and the schools trying to figure out what they're going to do and how they're going to prepare for the fall. So, you may see a slight decline in the second quarter, but then hopefully, ramping back up in third and fourth, so maybe fourth is a little higher than anticipated and the Q2 is a little bit lower, Q3 and Q4 maybe a little bit higher, and Q2 a little lower for this year. I don't know Mike [indiscernible]…

[Michael Pope:]

Yes, I think that's a good way to think about it, and it makes sense of course, Allen, right, because with schools shutting down, still working, but working from home and not being in office or in a school, that caused some delays, and then also schools tried to identify how they're going to tackle the current strategy with distance learning. That slowed some of the buying, but we think that schools by now are having solutions in place and are planning for the next school year, and so, we think that buying will start to ramp up again, and I think it's important to note that budgets are still strong as of now. There's been some constriction on certain budgets with reallocations, but generally from what we're hearing the school districts we're working with and the partners we sell through, the budgets are still strong, and we're expecting, yes, Q3 and Q4 to be on par or higher as what Takesha mentioned.

[Allen Klee:]

Thank you very much.

[Operator:]

And we have an additional question from Brian Kinstlinger with Alliance Global. Please go ahead.

[Brian Kinstlinger:]

Yes, great, thanks. To Allen's question on the $7.6 million of back order, can you speak to what the product mix looks like, maybe what the driver of some of that revenue is, and is that also mixed with your 30% gross margin kind of commentary for 2Q?

[Takesha Brown:]

So, the majority of that backlog is currently related to our hardware business, which -- that would align with what we are saying from a margin perspective.

[Brian Kinstlinger:]

I thought the hardware was little bit lower than the 30%, so will be not little bit lower in the 2Q expense?

[Takesha Brown:]

So, actually hardware if you look it, after we kind of take out a whole bunch of other items that we wanted to be shipping, that is a little bit higher what we are seeing right now, right, at about the 30%, but we also are anticipating some additional items from our professional development perspective that will offset this. So, at this point, we are anticipating that our margins will around 30%. Now, it was a little bit lower in the first quarter, because we -- San Diego was one of our really big projects that came through in first quarter, and so, we had some specialty customer pricing related to that, which resulted in a little bit lower margin that we anticipated, but we do foresee that for the year it will be the 30% or a little bit higher than that.

[Brian Kinstlinger:]

Thank you.

[Michael Pope:]

And just to clarify that this $0.6 million, that was customer orders, right, during Q1, and then we ended the quarter with backorders of $4.5 million.

[Brian Kinstlinger:]

Got it. So, the $4.5 million is the yet to be recognized revenue for 2Q?

[Michael Pope:]

That's correct.

[Takesha Brown:]

Correct.

[Brian Kinstlinger:]

Can you speak to the order trends more recently in April and May?

[Michael Pope:]

And so, Brian, our orders are still being strong, but that -- based on where we have been in similar times past and then also based the expectations, but that's because we had a lot in the [half] [Ph], like we said, a lot that was in the works that are still being shipped and fulfilled. I think the real test will be over the next few weeks in the next month or so as we are going to start to see our orders still coming in, and can we still maintain strong business. So, as of now, yes, we have been strong at this point of time.

[Brian Kinstlinger:]

Right, thanks so much.

[Operator:]

And that was our final question before return to Michael Pope for closing remarks.

[Michael Pope:]

Great. Well, thank you everyone for your support and for joining us today on our first quarter conference all. We look forward to speaking with you again in August when we report our second quarter results and that is the end of the call. Thank you again.

[Operator:]

This does conclude today's conference call. You may now disconnect your lines at this time. We thank you for your participation. Have a great day.