SPECIAL NOTE CONCERNING
FORWARD-LOOKING STATEMENTS
We believe that it is important to communicate our future expectations to our
security holders and to the public. This report, therefore, contains statements
about future events and expectations which are "forward-looking statements"
within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), including the statements
about our plans, objectives, expectations, and prospects. You can expect to
identify these statements by forward-looking words such as "may," "might,"
"could," "would," "should," "will," "anticipate," "believe," "plan," "estimate,"
"project," "expect," "intend," "seek," "are encouraged" and other similar
expressions. Any statement contained in this report that is not a statement of
historical fact may be deemed to be a forward-looking statement. Although we
believe that the plans, objectives, expectations and prospects reflected in or
suggested by our forward-looking statements are reasonable, those statements
involve risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by these
forward-looking statements, and we can give no assurance that our plans,
objectives, expectations and prospects will be achieved.
Important factors that might cause our actual results to differ materially from
the results contemplated by the forward-looking statements are contained in the
"Risk Factors" section of and elsewhere in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2021, and in our subsequent filings with the
Securities and Exchange Commission, and include, among others, the following:
· changes or advances in technology;
· the success of our land mobile radio product line;
· successful introduction of new products and technologies, including our
ability to successfully develop and sell our anticipated new multiband
product and other related products in the planned new BKR Series product
line and our announced SaaS solution;
· competition in the land mobile radio industry;
· general economic and business conditions, including federal, state and
local government budget deficits and spending limitations, any impact from
a prolonged shutdown of the U.S. Government, and the ongoing effects of
the COVID-19 pandemic, inflation, supply-chain constraints, ongoing
geopolitical conflicts and related sanctions;
· the availability, terms and deployment of capital;
· reliance on contract manufacturers and suppliers;
· risks associated with fixed-price contracts;
· heavy reliance on sales to agencies of the U.S. Government and our ability
to comply with the requirements of contracts, laws and regulations related
to such sales;
· allocations by government agencies among multiple approved suppliers under
existing agreements;
· our ability to comply with U.S. tax laws and utilize deferred tax assets;
· our ability to attract and retain executive officers, skilled workers and
key personnel;
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· our ability to manage our growth;
· our ability to identify potential candidates and consummate acquisition,
disposition or investment transactions, and risks incumbent to being a
noncontrolling interest stockholder in a corporation;
· the impact of general business conditions, including those resulting from
the COVID-19 pandemic, inflation, ongoing geopolitical conflicts and
related sanctions, on the companies in which we hold investments;
· impact of our capital allocation strategy;
· risks related to maintaining our brand and reputation;
· impact of government regulation;
· rising health care costs;
· our business with manufacturers located in other countries, including
changes in the U.S. Government and foreign governments' trade and tariff
policies, as well as any further impact resulting from the COVID-19
pandemic, inflation, ongoing geopolitical conflicts and related sanctions;
· our inventory and debt levels;
· protection of our intellectual property rights;
· fluctuation in our operating results and stock price;
· acts of war or terrorism, natural disasters and other catastrophic events,
such as the COVID-19 pandemic;
· any infringement claims;
· data security breaches, cyber-attacks and other factors impacting our
technology systems;
· availability of adequate insurance coverage;
· maintenance of our NYSE American listing;
· risks related to being a holding company; and
· the effect on our stock price and ability to raise equity capital through
future sales of shares of our common stock.
Some of these factors and risks have been, and may further be, exacerbated by
the COVID-19 pandemic and general economic conditions, including the ongoing
military conflict in Ukraine, such as inflationary pressures and disruptions in
the global supply chain. We assume no obligation to publicly update or revise
any forward-looking statements made in this report, whether as a result of new
information, future events, changes in assumptions or otherwise, after the date
of this report. Readers are cautioned not to place undue reliance on these
forward-looking statements.
Reported dollar amounts in the management's discussion and analysis ("MD&A")
section of this report are disclosed in millions or as whole dollar amounts.
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The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and notes thereto appearing
elsewhere in this report and the MD&A, consolidated financial statements and
notes thereto appearing in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2021, filed with the SEC on March 17, 2022, as amended by
filing Form 10-K/A with the SEC on April 29, 2022.
Executive Overview
BK Technologies Corporation (NYSE American: BKTI) (together with its wholly
owned subsidiaries, "BK," the "Company," "we" or "us") is a holding company
that, through BK Technologies, Inc., its operating subsidiary, provides public
safety grade communications products and services which make first responders
safer and more efficient. All operating activities described herein are
undertaken by our operating subsidiary.
In business for over 70 years, BK operates two business units through its
operating subsidiary, BK Technologies, Inc.; Radio and SaaS.
The Radio business unit designs, manufactures and markets American-made wireless
communications products consisting of two-way land mobile radios ("LMRs").
Two-way LMRs can be radios that are hand-held (portable) or installed in
vehicles (mobile).
Generally, BK Technologies-branded products serve the government markets
including but not limited to emergency response, public safety, United States
Department of Agriculture, United States Department of Homeland Security and
military customers of federal, state and municipal government agencies, as well
as various industrial and commercial enterprises. We believe that our products
and solutions provide superior value by offering a high specification,
ruggedized, durable, reliable, feature rich, Project 25 (P25) compliant radio at
a lower cost relative to comparable offerings.
The SaaS business unit focuses on delivering innovative, public safety
smartphone applications which operate ubiquitously over the public cellular
networks. Our BKRplay branded smartphone application will offer multiple
services which make the first responder safer and more efficient. When tethered
to our radios, the combined solution will offer more unique capability which
increases the sales reach of our radios.
We were incorporated under the laws of the State of Nevada on October 24, 1997.
We are the resulting corporation from the reincorporation merger of our
predecessor, Adage, Inc., a Pennsylvania corporation, which reincorporated from
Pennsylvania to Nevada effective as of January 30, 1998. Effective on June 4,
2018, we changed our corporate name from "RELM Wireless Corporation" to "BK
Technologies, Inc."
Our principal executive offices and manufacturing facility are located at 7100
Technology Drive, West Melbourne, Florida 32904 and our telephone number is
(321) 984-1414.
Available Information
Our Internet website address is www.bktechnologies.com. We make available on our
Internet website, free of charge, our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and
amendments to these reports as soon as practicable after we file such material
with, or furnish it to, the U.S. Securities and Exchange Commission (the "SEC").
In addition, our Code of Business Conduct and Ethics, Code of Ethics for the CEO
and Senior Financial Officers, Audit Committee Charter, Compensation Committee
Charter, Nominating and Governance Committee Charter and other corporate
governance policies are available on our website, under "Investor Relations."
The information contained on our website is not incorporated by reference in
this report. A copy of any of these materials may be obtained, free of charge,
upon request from our investor relations department by submitting a written
request to bktechnologies@imsinvestorrelations.com or calling (203) 972-9200.
Additional information regarding our investor relations department can be found
at our website. All reports that the Company files with or furnishes to the SEC
also are available free of charge via the SEC's website at http://www.sec.gov.
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Impact of COVID-19 Pandemic and Recent Capital Markets Disruption
In December 2019, a novel strain of the coronavirus (COVID-19) surfaced, which
spread globally and was declared a pandemic by the World Health Organization in
March 2020. In response to the COVID-19 pandemic, we implemented certain
policies at our offices in accordance with best practices to accommodate, and at
times mandate, social distancing, wearing face masks, and remote work practices.
Among other things, we have invested in employee safety equipment, additional
cleaning supplies and measures, adjusted production lines and workplaces as
necessary and adapted new processes for interactions with our suppliers and
customers to safely manage our operations. Any employees that test positive for
COVID-19 are quarantined and, if possible, work remotely in accordance with
accepted safety practices until after passing subsequent testing.
Additionally, U.S. and global markets are experiencing volatility and disruption
following the escalation of geopolitical tensions and the start of the military
conflict between Russia and Ukraine. On February 24, 2022, a full-scale military
invasion of Ukraine by Russian troops was reported. Although the length and
impact of the ongoing military conflict is highly unpredictable, the conflict in
Ukraine could lead to market disruptions, including significant volatility in
commodity prices, credit and capital markets, as well as supply chain
interruptions. We are continuing to monitor the situation in Ukraine and
globally and assessing its potential impact on our business.
Furthermore, Russia's prior annexation of Crimea, recent recognition of two
separatist republics in the Donetsk and Luhansk regions of Ukraine and
subsequent military interventions in Ukraine have led to sanctions and other
penalties being levied by the United States, European Union and other countries
against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk
People's Republic, and the so-called Luhansk People's Republic, including
agreement to remove certain Russian financial institutions from the Society for
Worldwide Interbank Financial Telecommunication ("SWIFT") payment system.
Additional potential sanctions and penalties have also been proposed and/or
threatened. Russian military actions and the resulting sanctions could adversely
affect the global economy and financial markets and lead to instability and lack
of liquidity in capital markets, potentially making it more difficult for us to
obtain additional funds.
The impact to our business in 2022, particularly customer orders, is not known
with certainty. Recently, worldwide shortages of materials, particularly
semiconductors and integrated circuits, have resulted in limited supplies,
extended lead times, and increased costs and inventory levels for certain
components used in our products. While, generally, we have been able to procure
the material necessary to manufacture our products and fulfill customer orders,
there have been delays and long delivery times within our supply chain. While
the progression and duration of these shortages is not known with certainty,
they may last for several quarters or years. The impact on our operations of
such shortages, or additional shortages that may surface, is uncertain, but
could potentially impact our future sales, manufacturing operations and
financial results. Continued progression of these circumstances could result in
a decline in customer orders, as our customers could shift purchases to
lower-priced or other perceived value offerings or reduce their purchases and
inventories due to decreased budgets, reduced access to credit or various other
factors, and impair our ability to manufacture our products, which could have a
material adverse impact on our results of operations and cash flow. While the
current impacts of COVID-19 and ongoing geopolitical conflicts and related
sanctions are reflected in our results of operations, we cannot at this time
separate the direct impacts of these matters from other factors that cause our
performance to vary from quarter to quarter. The ultimate duration and impact of
the COVID-19 pandemic, the ongoing geopolitical conflicts and related sanctions
on our business, results of operations, financial condition and cash flows is
dependent on future developments, including the duration and severity of the
pandemic, the duration of the ongoing conflict in Ukraine and additional
sanctions related thereto, and the related length of the impact on the global
economy, which are uncertain and cannot be predicted at this time. Even after
the COVID-19 pandemic has subsided and geopolitical tensions subside, we may
continue to experience an adverse impact to our business as a result of the
national and, to some extent, global economic impact. Furthermore, the extent to
which our mitigation efforts are successful, if at all, is not presently
ascertainable. However, our results of operations in future periods may continue
to be adversely impacted by the COVID-19 pandemic, the ongoing geopolitical
conflict and related sanctions, and their negative effects on global economic
conditions.
We may experience fluctuations in our quarterly results, in part, due to
governmental customer spending patterns that are influenced by government fiscal
year-end budgets and appropriations. We may also experience fluctuations in our
quarterly results, in part, due to our sales to federal and state agencies that
participate in wildland fire-suppression efforts, which may be greater during
the summer season when forest fire activity is heightened. In some years, these
factors may cause an increase in sales for the second and third quarters,
compared with the first and fourth quarters of the same fiscal year. Such
increases in sales may cause quarterly variances in our cash flow from
operations and overall financial condition.
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Third Quarter and Nine Months Summary
Customer demand and orders for our products continued to be strong during the
three and nine months ended September 30, 2022. Supply chain constraints limited
our ability to manufacture the quantities needed to ship and fulfill all the
orders. The State of Florida and our headquarters location in West Melbourne,
Florida, was also impacted by hurricane Ian in the last week of September, which
impacted our ability to ship product to our customers. Consequently, these
orders were carried in backlog, and we anticipate fulfilling many of these
orders during subsequent quarters.
Overall, our revenues for the three months ended September 30, 2022, declined
somewhat compared with the same period of last year. For the third quarter 2022,
sales decreased 5.6% from the third quarter last year and 1.6% from the
immediately preceding quarter. The decline in sales for the third quarter
brought sales for the nine-months ended September 30, 2022, within 5.9% of the
same nine-month period last year. Gross profit margins as a percentage of sales
for the third quarter and nine-month periods of 2022 decreased compared with the
same periods of last year, generally reflecting cost increases in materials and
freight, and lower production volumes due to certain electronic
component shortages. Selling, general and administrative ("SG&A") expenses for
the third quarter of 2022 were 2.8% higher than the SG&A expenses for the third
quarter last year, while SG&A expenses for the nine-month period ended September
30, 2022, increased 14.7% compared to the same period last year. The increase in
general and administrative expenses is attributed primarily to corporate and
headquarters staffing and strategic initiatives. These factors yielded operating
losses for the three and nine month periods ended September 30, 2022, that
increased primarily due to supply chain material challenges compared to the same
periods last year.
For the third quarter of 2022, our sales decreased 5.6% to approximately $11.9
million, compared with approximately $12.6 million for the same quarter last
year. For the nine months ended September 30, 2022, sales totaled approximately
$30.6 million, compared with approximately $32.5 million for the same period
last year.
Gross profit margins as a percentage of sales for the third quarter of 2022 were
approximately 18.8%, compared with 32.8% for the third quarter last year. For
the nine-month period ended September 30, 2022, gross profit margins as a
percentage of sales were approximately 17.8%, compared with 35.7% when compared
to the same periods last year.
SG&A expenses for the third quarter of 2022 totaled approximately $4.6 million,
compared with approximately $4.5 million for the same quarter last year. SG&A
expenses for the first nine months of 2022 increased 14.7% to approximately
$15.0 million, compared with approximately $13.0 million for the same period
last year.
For the third quarter of 2022, we recognized an operating loss of approximately
$2.4 million, compared with an operating loss of approximately $0.4 million for
the same quarter last year. For the nine-month period ended September 30, 2022,
our operating loss totaled approximately $9.5 million, compared with
approximately $1.4 million for the same period last year.
For the third quarter of 2022, we recognized a net realized and unrealized gain
totaling approximately $76 thousand on our investment in FG Financial Group,
Inc. made through FG Financial Holdings, LLC. This compares with an unrealized
loss of approximately $2.2 million on the investment in FG Financial Group, Inc.
made through FG 1347 Holdings, LP for the third quarter last year. For the
nine-month period ended September 30, 2022, we recognized net realized and
unrealized losses of approximately $1.0 million, compared with an unrealized
gain of $310 thousand for last year's nine-month period.
Net loss for the three months ended September 30, 2022, was approximately $2.4
million ($0.14 per basic and diluted share), compared with a net loss of
approximately $2.6 million ($0.15 per basic and diluted share) for the same
quarter last year. For the nine months ended September 30, 2022, our net loss
totaled approximately $10.7 million ($0.63 per basic and diluted share),
compared with a net loss of approximately $1.4 million ($0.10 per basic and
diluted share) for the same period last year.
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As of September 30, 2022, working capital totaled approximately $14.6 million,
of which approximately $9.4 million was comprised of cash, cash equivalents and
trade receivables. As of December 31, 2021, working capital totaled
approximately $25.2 million, of which approximately $18.8 million was comprised
of cash, cash equivalents and trade receivables.
Results of Operations
As an aid to understanding our operating results for the periods covered by this
report, the following table shows selected items from our condensed consolidated
statements of operations expressed as a percentage of sales:
Percentage of Sales Three Months Percentage of Sales Nine Months
Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2022 2021 2022 2021
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of products (81.2 ) (67.2 ) (82.2 ) (64.3 )
Gross margin 18.8 32.8 17.8 35.7
Selling, general
and
administrative
expenses (38.9 ) (35.7 ) (48.9 ) (40.1 )
Other income
(expense), net (0.1 ) (17.4 ) (3.8 ) 0.7
Loss before
income taxes (20.2 ) (20.3 ) (34.9 ) (3.7 )
Income tax
(expense) benefit (0.0 ) (0.0 ) (0.0 ) (0.6 )
Net loss (20.2 )% (20.3 )% (34.9 )% (4.3 )%
Net Sales
For the third quarter ended September 30, 2022, net sales decreased 5.6% to
approximately $11.9 million, compared with approximately $12.6 million for the
same quarter last year. Sales for the nine months ended September 30, 2022,
totaled approximately $30.6 million, compared with approximately $32.5 million
for the nine-month period last year.
Customer demand and orders for our products continued to be strong, driving
record bookings for the third quarter of 2022. Supply chain constraints limited
our ability to manufacture the quantities needed to convert the orders into
shipments and sales revenue. Consequently, unshipped orders were carried in
backlog, and we anticipate fulfilling a portion of the orders in backlog during
fourth quarter this year. We are taking steps to manage delays in the supply
chain, including carrying additional inventory of material and components with
limited supplies. Although supply chain factors may continue to impact shipments
during the next quarter, we anticipate being able to fulfill customer
requirements. The precise impact to sales and shipments for the remainder of
2022, however, cannot be quantified.
Sales for the three months ended September 30, 2022 were attributed primarily to
certain state and local public safety opportunities, as well as federal wildland
fire related agencies. From a product perspective, the primary contributor to
orders and shipments during the third quarter was our BKR 5000 portable radio
and related accessories. The BKR Series is envisioned as a comprehensive line of
new products, which will include new models in coming quarters. The timing of
developing additional BKR Series products and bringing them to market could be
impacted by various factors, including potential impacts related to our supply
chain and the COVID-19 pandemic to various electronic component suppliers. BKR
Series products, we believe, should increase our addressable market by expanding
the number of federal and other public safety customers that may purchase our
products. However, the timing and size of orders from agencies at all levels can
be unpredictable and subject to budgets, priorities, and other factors.
Accordingly, we cannot assure that sales will occur under particular contracts,
or that our sales prospects will otherwise be realized.
While the potential impacts of material shortages, lead-times, the COVID-19
pandemic, and ongoing geopolitical conflict and related sanctions in coming
months and quarters remain uncertain, such effects have the potential to
adversely impact our customers and our supply chain. Such negative effects on
our customers and suppliers could adversely affect our future sales, gross
profit margins, operations, and financial results.
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Cost of Products and Gross Profit Margin
Gross profit margins as a percentage of sales for the third quarter ended
September 30, 2022 were approximately 18.8%, compared with 32.8% for the same
quarter last year. For the nine-month period ended September 30, 2022, gross
profit margins were approximately 17.8%, compared with 35.7% for the same period
last year.
Our cost of products and gross profit margins are primarily derived from
material, labor and overhead costs, product mix, manufacturing volumes and
pricing. Gross profit margins for the quarter ended September 30, 2022 decreased
compared with the same period last year, primarily due to increased material
costs, including electronic components, as well as escalated freight costs,
which yielded sub-optimal absorption of manufacturing overhead costs.
During recent quarters, worldwide shortages of materials, including
semiconductors and integrated circuits, have resulted in limited supplies,
extended lead times and higher costs for certain components used in our
products. Accordingly, we have experienced delivery delays and increased costs
within our supply chain. While the progression and duration of these shortages
is not known with certainty, we are monitoring a number of critical components
for product cost improvement, but the shortages may last for several quarters.
The impact on our operations of such shortages and increased product costs is
uncertain, but could potentially impact our future sales, gross profit margins,
manufacturing operations and financial results. We utilize a combination of
internal manufacturing capabilities and contract manufacturing relationships for
production efficiencies and to manage material and labor costs. While we
anticipate continuing to do so in the future, we have increased and are
continuing to increase our utilization of U.S.-based resources, which provides
greater security and control over our production. We believe that our current
manufacturing capabilities and contract relationships or comparable alternatives
will continue to be available to us. However, we may encounter new product cost
and competitive pricing pressures in the future and the extent of their impact
on gross margins, if any, is uncertain.
Selling, General and Administrative Expenses
SG&A expenses consist of marketing, sales, commissions, engineering, product
development, management information systems, accounting, headquarters, and
non-cash share-based employee compensation expenses.
SG&A expenses for the third quarter ended September 30, 2022, totaled
approximately $4.6 million (38.9% of sales), compared with approximately $4.5
million (35.7% of sales) for the same quarter last year. For the nine months
ended September 30, 2022, SG&A expenses increased by $2.0 million, or 14.6%, to
approximately $15.0 million (48.9% of sales), compared with approximately $13.0
million (40.1% of sales), for the nine-month period last year.
Engineering and product development expenses for the third quarter of 2022
totaled approximately $2.1 million (17.9% of sales), compared with approximately
$2.0 million (16.1% of sales) for the same quarter of last year. For the nine
months ended September 30, 2022, engineering and product development expenses
totaled approximately $6.7 million (22.0% of sales), compared with approximately
$6.2 million (18.9% of sales) for the nine-month period last year. The increase
in engineering expenses is attributed primarily to ongoing product design and
development activities, particularly prototyping, for the new BKR series radios.
Most of these activities are being performed by our internal engineering team
and are their primary focus, combined with sustaining engineering support of our
existing products. The precise date for developing and introducing new products
is uncertain and can be impacted by, among other things, supply chain shortages
and the potential effects of the COVID-19 pandemic in coming months and
quarters.
Marketing and selling expenses for the third quarter of 2022 totaled
approximately $1.1 million (8.7% of sales), compared with approximately $1.0
million (8.2% of sales) for the third quarter last year. For the nine months
ended September 30, 2022, marketing and selling expenses increased approximately
$0.1 million, or 2.4%, to approximately $3.1 million (10.2% of sales), compared
with approximately $3.0 million (9.3% of sales). The increase for the nine-month
period ended September 30, 2022 are primarily reflecting increases in reflect
activities in support of anticipated sales growth from new products and
customers.
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Other general and administrative expenses for the third quarter 2022 totaled
approximately $1.4 million (12.2% of sales), compared with approximately $1.4
million (11.4% of sales) for the same quarter last year. For the nine months
ended September 30, 2022, general and administrative expenses totaled
approximately $5.1 million (16.6% of sales), compared with approximately $3.8
million (11.8% of sales) for the nine-month period last year. The increase in
general and administrative expenses for the three and nine month period ending
September 30, 2022 is attributed primarily to corporate and headquarters
staffing and strategic initiatives.
Operating Loss
The operating loss for the third quarter ended September 30, 2022, totaled
approximately $2.4 million (20.1% of sales), compared with approximately $370
thousand (2.9% of sales) for last year's third quarter. For the nine months
ended September 30, 2022, our operating loss totaled approximately $9.5 million
(31.1% of sales), compared with approximately $1.4 million (4.4% of sales) for
the nine-month period last year. The operating loss for the quarter ended
September 30, 2022 is attributed primarily to increased product costs, which
adversely impacted gross profit margins and increased operating expenses. The
operating loss for the nine months ended September 30, 2022 is primarily
attributed to increased product costs and a decrease in sales, which adversely
impacted gross profit margins and increased operating expenses.
Other (Expense) Income
We recorded net interest expense of approximately $30,000 for the third quarter
ended September 30, 2022, compared with approximately $19,000 for the third
quarter of last year. For the nine months ended September 30, 2022, net interest
expense totaled approximately $70,000, compared with net interest expense of
approximately $37,000 for the nine-month period last year. Net interest expense
was primarily the result of equipment financing, our revolving credit facility
and lower average cash balances.
For the third quarter ended September 30, 2022, we recognized a net realized
and unrealized gain of approximately $0.1 million on our investment in FG
Financial, compared with an unrealized loss of approximately $2.2 million in FG
Financial Group, Inc. made through FG 1347 Holdings, LP for the third quarter
last year. For the nine months ended September 30, 2022, we recognized realized
and unrealized losses of approximately $1.0 million on our investment, compared
with an unrealized gain of approximately $0.3 for the same period last year.
Income Taxes
We recorded no tax expense or benefit for the quarter ended and for the nine
months ended September 30, 2022, compared with no income tax provision for the
third quarter and an income tax expense of $184,000 for the nine month period
last year.
Our income tax provision is based on management's estimate of the effective tax
rate for the full year. The tax provision (benefit) in any period will be
affected by, among other things, permanent, as well as temporary, differences in
the deductibility of certain items, in addition to changes in tax legislation.
As a result, we may experience significant fluctuations in the effective book
tax rate (that is, tax expense divided by pre-tax book income) from period to
period.
As of September 30, 2022, our net deferred tax assets totaled approximately $4.1
million, and were primarily derived from research and development tax credits,
operating loss carryforwards and deferred revenue.
In order to fully utilize the net deferred tax assets, we will need to generate
sufficient taxable income in future years. We analyze all positive and negative
evidence to determine if, based on the weight of available evidence, we are more
likely than not to realize the benefit of the net deferred tax assets. The
recognition of the net deferred tax assets and related tax benefits is based
upon our conclusions regarding, among other considerations, estimates of future
earnings based on information currently available and current and anticipated
customers, contracts, and product introductions, as well as historical operating
results and certain tax planning strategies.
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Based on our analysis of all available evidence, both positive and negative, we
have concluded that we do not have the ability to generate sufficient taxable
income in the necessary period to utilize the entire benefit for the deferred
tax assets. Accordingly, we established a valuation allowance of $3.0 million
and $0.6 million as of September 30, 2022 and December 31, 2021. We cannot
presently estimate what, if any, changes to the valuation of our deferred tax
assets may be deemed appropriate in the future. If we incur future losses, it
may be necessary to record additional valuation allowance related to the
deferred tax assets recognized as of September 30, 2022.
Liquidity and Capital Resources
For the nine months ended September 30, 2022, net cash used in operating
activities totaled approximately $6.9 million, compared with cash used by
operating activities of approximately $3.6 million for the same period last
year. Cash used in operating activities for the nine months ended September 30,
2022, was primarily related to a net loss and increased inventory, which were
partially offset by increased accounts payable, a decrease in accounts
receivable and an unrealized loss in marketable securities.
For the first nine months of 2022, we had a net loss of approximately $10.7
million, compared with a net loss of approximately $1.4 million for the same
period last year. Gross inventories increased during the nine months ended
September 30, 2022 by approximately $9.4 million, compared with approximately
$6.0 million for the same period last year. The increases for inventories were
attributed primarily to increased purchases to account for the limited material
and component availability combined with extended supplier lead-times and
planned new product introductions. Prepaid expenses increased during the nine
months ended September 30, 2022 by approximately $77,000, compared with an
increase of $63,000 for the same period last year. Accounts receivable
decreased approximately $2.9 million during the nine months ended September 30,
2022, compared with an increase of approximately $1.2 million for the same
period last year. The decrease was primarily due to lower revenues and higher
customer collections during the nine months ended September 30, 2022. Accounts
payable for the nine months ended September 30, 2022, increased approximately
$7.4 million, compared with an increase of approximately $2.4 million for the
same period last year, primarily due to increased material and component
purchases from suppliers related in-part to delays and shortages within our
supply chain. Depreciation and amortization totaled approximately $1.1 million
for the nine months ended September 30, 2022, compared with approximately $1.0
million for the same period last year. Depreciation and amortization are
primarily related to manufacturing and engineering equipment. The loss
on investments for the nine months ended September 30, 2022, totaled
approximately $1.0 million, compared with an unrealized gain of approximately
$310 thousand for same period last year. For additional information pertaining
to our investments, refer to Note 1 (Condensed Consolidated Financial
Statements) and Note 6 (Investments) to the condensed consolidated financial
statements included in this report.
Cash used in investing activities for the nine months ended September 30, 2022,
totaled approximately $1.0 million, compared with approximately $1.9 million for
the same period last year. The cash used for both periods was attributed
primarily to the purchase of engineering and manufacturing related equipment.
For the nine months ended September 30, 2022, cash of approximately $1.3 million
was provided by financing activities, compared with cash provided by financing
activities of approximately $12.8 million for the same period last year. During
the nine months ended September 30, 2022 we paid quarterly dividends, utilizing
approximately $1.5 million, while for the same period last year, we paid a
quarterly dividend of approximately $0.8 million. During the nine months ended
September 30, 2022, we received proceeds of approximately $3.0 million from our
revolving credit facility and notes payable compared to $3.5 million for the
same period last year. This was partially offset by loan and revolving credit
facility repayments of approximately $0.2 million for the nine months ended
September 30, 2022 compared to $1.5 million for the same period last year. For
the nine months ended September 30, 2021, we closed a public offering of our
common stock, generating net proceeds of approximately $11.6 million.
On January 31, 2022, our revolving credit facility, which originated on January
30, 2020, was extended for one year, through January 31, 2023.
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BK Technologies, Inc., our wholly owned subsidiary, entered into the $5 million
Credit Agreement with JPMC. The Credit Agreement provides for a revolving line
of credit of up to $5 million, with availability under the line of credit
subject to a borrowing base calculated as a percentage of accounts receivable
and inventory. Proceeds of borrowings under the Credit Agreement may be used for
general corporate purposes. The line of credit is collateralized by a blanket
lien on all personal property of BK Technologies, Inc. pursuant to the terms of
the Continuing Security Agreement with JPMC. BK Technologies Corporation and
each subsidiary of BK Technologies, Inc., are guarantors of the obligations
under the Credit Agreement, in accordance with the terms of the Continuing
Guaranty.
Borrowings under the Credit Agreement will bear interest at the secured
overnight financing rate plus a margin of 2.0%. The line of credit, as modified,
is to be repaid in monthly payments of interest only, payable in arrears,
commencing on February 1, 2022, with all outstanding principal and interest to
be payable in full at maturity (January 31, 2023).
The Credit Agreement contains certain customary restrictive covenants, including
restrictions on liens, indebtedness, loans and guarantees, acquisitions and
mergers, sales of assets, and stock repurchases by BK Technologies, Inc. The
Credit Agreement contains one financial covenant requiring BK Technologies,
Inc., to maintain a tangible net worth of at least $20 million at any fiscal
quarter end.
The Credit Agreement provides for customary events of default, including: (1)
failure to pay principal, interest or fees under the Credit Agreement when due
and payable; (2) failure to comply with other covenants and agreements contained
in the Credit Agreement and the other documents executed in connection
therewith; (3) the making of false or inaccurate representations and warranties;
(4) defaults under other agreements with JPMC or under other debt or other
obligations of BK Technologies, Inc.; (5) money judgments and material adverse
changes; (6) a change in control or ceasing to operate business in the ordinary
course; and (7) certain events of bankruptcy or insolvency. Upon the occurrence
of an event of default, JPMC may declare the entire unpaid balance immediately
due and payable and/or exercise any and all remedial and other rights under the
Credit Agreement.
BK Technologies, Inc. was in compliance with all covenants under the Credit
Agreement as of September 30, 2022, and the date of filing this report. As of
September 30, 2022, the Company had an outstanding balance of approximately
$4,458 and a net balance availability of approximately $542 under the Credit
Agreement. As of the date of filing this report, the Company had an outstanding
balance of approximately $4,458, and a net balance availability of approximately
$542 under the Credit Agreement.
On April 6, 2021, BK Technologies, Inc., a wholly owned subsidiary of BK
Technologies Corporation, and JPMC, as a lender, entered into a Master Loan
Agreement in the amount of $743 to finance various items of manufacturing
equipment. The loan is collateralized by the equipment purchased using the
proceeds. The Master Loan Agreement is payable in 48 equal monthly principal and
interest payments of approximately $16 beginning on May 8, 2021, matures on
April 8, 2025, and bears a fixed interest rate of 3.0%.
Our cash and cash equivalents balance at September 30, 2022, was approximately
$4.0 million. We believe these funds, combined with anticipated cash generated
from operations and borrowing availability under our Credit Agreement, are
sufficient to meet our working capital requirements for the foreseeable future.
We may, depending on a variety of factors, including market conditions for
capital raises, the trading price of our common stock and opportunities for uses
of any proceeds, engage in public or private offerings of equity or debt
securities to increase our capital resources. However, financial and economic
conditions, including those resulting from the COVID-19 pandemic, could limit
our access to credit and impair our ability to raise capital, if needed, on
acceptable terms or at all. We also face other risks that could impact our
business, liquidity, and financial condition. For a description of these risks,
see "Item 1A. Risk Factors" set forth in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2021, and "Item 1A. Risk Factors" below in this
report.
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Critical Accounting Policies
In response to the Securities and Exchange Commission's financial reporting
release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting
Policies, we have selected for disclosure our revenue recognition process and
our accounting processes involving significant judgments, estimates and
assumptions. These processes affect our reported revenues and current assets and
are, therefore, critical in assessing our financial and operating status. We
regularly evaluate these processes in preparing our financial statements. The
processes for revenue recognition, allowance for collection of trade
receivables, allowance for excess or obsolete inventory and income taxes involve
certain assumptions and estimates that we believe to be reasonable under present
facts and circumstances. These estimates and assumptions, if incorrect, could
adversely impact our operations and financial position.
There were no changes to our critical accounting policies during the nine months
ended September 30, 2022.
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