Forward-Looking Statements
We believe that it is important to communicate our future expectations to our
security holders and to the public. This report, including any information
incorporated by reference in 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, as amended, and 21E of
the Exchange Act, including the statements about our plans, objectives,
expectations and prospects under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations." 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. We also may
make forward-looking statements in other documents that are filed or furnished
with the SEC. In addition, we may make forward-looking statements orally or in
writing to investors, analysts, members of the media, or others. Forward-looking
statements include, but are not limited to, the following: changes or advances
in technology; the success of our SaaS and Radio business lines and the products
offered thereunder; successful introduction of new products and technologies,
including our ability to successfully develop and sell our anticipated SaaS
products, and our new multiband radio product and other related products in the
planned new BKR Series product line; competition in the LMR industry; general
economic and business conditions, including federal, state and local government
budget deficits and spending limitations and any impact from a prolonged
shutdown of the U.S. Government; the availability, terms and deployment of
capital; reliance on contract manufacturers and suppliers; risks associated with
fixed-price contacts; 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; our ability to
manage our growth; our ability to identify potential candidates for, and
consummate, acquisition, disposition or investment transactions, and risks
incumbent to being a noncontrolling interest stockholder in a corporation;
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; 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; 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 of future sales of shares of
our common stock.
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. Any forward-looking
statement made by us or on our behalf speaks only as of the date that it was
made. We do not undertake to update any forward-looking statement to reflect the
impact of events, circumstances, or results that arise after the date that the
statement was made, except as required by applicable securities laws. You,
however, should consult further disclosures (including disclosures of a
forward-looking nature) that we may make in any subsequent Annual Report on Form
10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.
Important factors that might cause our actual results to differ materially from
the results contemplated by the forward-looking statements are contained in
"Part I-Item 1A. Risk Factors" and elsewhere in this report and in our
subsequent filings with the SEC. 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.
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Executive Summary
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, 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, 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 are located at 7100 Technology Drive, West
Melbourne, Florida 32904 and our telephone number is (321) 984-1414.
Customer demand and orders for our products were strong during 2022. Supply
chain constraints limited our ability to manufacture the quantities needed to
ship and fulfill all the orders. Consequently, these orders were carried in
backlog, and we anticipate fulfilling many of these orders during the first half
of 2023.
For 2022, sales grew approximately 12.3% to approximately $51.0 million,
compared with $45.4 million for the prior year. The growth was attributed
primarily to state and local public safety agencies, as well as the first model
in our BKR line of products. Gross profit margins as a percentage of sales in
2022 were 19.3%, compared with 35.8% for the prior year, generally reflecting
increases in material, component and freight costs. Selling, general and
administrative ("SG&A") expenses for 2022 totaled approximately $20.9 million
(41.1% of sales), compared with $17.5 million (38.5% of sales) last year. We
recognized an operating loss in 2022 of approximately $11.1 million, which was
attributed primarily to increased product costs and operating expenses. For the
prior year we recognized an operating loss of approximately $1.2 million.
In 2022 we recognized other expenses, net totaling approximately 553,000,
primarily attributed to net realized and unrealized losses from our investment
in FG Financial Group, Inc. This compares with other expense of $318,000 last
year, which was also primarily related to an unrealized loss from the investment
in FG Financial Group, Inc.
For 2022 the pretax loss totaled approximately $11.6 million, compared with
pretax loss of approximately $1.5 million for the prior year.
We recognized no tax expense in 2022, compared with approximately $187,000 for
the prior year. Our income tax expense for 2021 was largely non-cash as a result
of deferred items.
The net loss for 2022 totaled approximately $11.6 million ($0.69 per basic
share), compared with net loss of approximately $1.7 million ($0.11 per basic
share) last year.
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As of December 31, 2022, working capital totaled approximately $13.2 million, of
which $12.5 million was comprised of cash, cash equivalents and trade
receivables. This compares with working capital totaling approximately $25.2
million at 2021 year-end, which included $18.8 million of cash, cash equivalents
and trade receivables. During 2022, we declared three and paid four quarterly
dividends, utilizing cash of approximately $2.0 million.
Impact of COVID-19 Pandemic and Supply Chain
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. The challenges posed by the COVID-19 pandemic on the global economy
increased significantly in the first several months of 2020. In response to
COVID-19, national and local governments around the world instituted certain
measures, including travel bans, prohibitions on group events and gatherings,
shutdowns of certain businesses, curfews, shelter-in-place orders, and
recommendations to practice social distancing. We are considered an "essential
business" that is supporting first responders and our manufacturing operations
have remained open throughout the 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.
In planning for the possible disruption of our business, we took steps to reduce
expenses throughout the Company. This included suspending all Company travel
for a period of time, as well as our participation in trade shows and other
business meetings, instituting strict inventory control and decreasing
expenditures. We also implemented workforce reductions during the third quarter
of 2020 and suspended the employer's 401K match. The impact to our business in
2021, particularly customer orders, is not known with any certainty However, we
received record customer orders of approximately $70 million in 2022. Worldwide
shortages of materials, particularly semiconductors and integrated circuits,
have resulted in limited supplies, extended lead times, and increased our 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 in 2022, there have been some delays
and longer 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 are reflected in our results of operations, we cannot at this time
separate the direct COVID-19 impacts from other factors that cause our
performance to vary from quarter to quarter. The ultimate duration and impact of
the COVID-19 pandemic on our business, results of operations, financial
condition and cash flows is dependent on future developments, including the
duration and severity of the pandemic, and the related length of its impact on
the global economy, which are uncertain and cannot be predicted at this time.
Even after the COVID-19 pandemic has subsided, we may continue to experience an
adverse impact to our business as a result of its 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 and its negative effects on global economic conditions. For
additional risks relating to the COVID-19 pandemic, see Item 1A. Risk Factors in
Part II of this report.
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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Results of Operations
As an aid to understanding our operating results, the following table shows
items from our consolidated statements of operations expressed as a percentage
of sales:
Percent of Sales
for Years Ended December 31,
2022 2021
Sales 100.0 % 100.0 %
Cost of products (80.7 ) (64.2 )
Gross margin 19.3 35.8
Selling, general and administrative expenses (41.1 ) (38.5 )
Other (expense) income, net (1.1 ) (0.7 )
(Loss) income before income taxes (22.8 ) (3.3 )
Income tax expense - (0.4 )
Net Income (loss) (22.8 )% (3.7 )%
Fiscal Year 2022 Compared With Fiscal Year 2021
Sales, net
For 2022, net sales increased approximately $5.6 million to approximately $51.0
million, compared with approximately $45.4 million last year.
Customer demand and orders for our products were strong in 2022. Supply chain
constraints limited our ability to manufacture the quantities needed to convert
the orders into shipments and sales revenue. Accordingly, as of December 31,
2022, these orders were carried in backlog, and we anticipate fulfilling many of
them during the first half of 2023. Although supply chain factors may continue
to create delays for certain components during the next few quarters, we
anticipate being able to fulfill customer requirements. The precise impact to
sales and shipments in any particular quarter, however, cannot be quantified.
Sales for the year ended December 31, 2022, were attributed primarily to
federal, state and municipal public safety agencies, some of which were new
customers.
The sale of the BKR 5000, the first model in our new BKR Series of APCO P25 land
mobile radio products and solutions was launched in the second half of 2020 and
significantly impacted sales in 2021. The BKR Series is envisioned as a
comprehensive line of new products, which will include additional 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, labor shortages, wage pressures,
rising inflation, and other force majeure events, such as the COVID-19 pandemic.
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.
As of the end of 2022, our current backlog of customer orders and the funnel of
sales prospects is healthy and includes potential new customers in federal,
state, and local public safety agencies. We believe the BKR Series products, our
expanded sales force, and our sales funnel, position us well to capture new
sales opportunities moving forward.
The impacts of material shortages, lead-times, labor shortages, wage pressures,
rising inflation, the ongoing military conflict between Russia and Ukraine and
other geopolitical events, and the COVID-19 pandemic in coming months and
quarters is uncertain. Such effects have the potential to adversely impact our
customers and our supply chain, which could adversely affect our future sales,
operations, and financial results.
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Cost of Products and Gross Profit Margin
Gross profit margins as a percentage of sales for 2022 were approximately 19.3%,
compared with 35.8% for the prior 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 year ended December 31, 2022, decreased
compared with the same period last year primarily due to increased material,
component and freight costs related primarily to supply chain factors, as well
as one-time inventory adjustment related to certain components of our BKR
product line.
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. Although in the
future we may encounter new product cost and competitive pricing pressures, the
extent of their impact on gross margins, if any, is uncertain.
During recent quarters, worldwide shortages of materials, including
semiconductors and integrated circuits, have resulted in limited supplies and
extended lead times 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, extended lead
times and increased costs within our supply chain. While the progression and
duration of these shortages is not known with certainty, they may have a lesser
impact our operations for the next few quarters. 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.
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 year ended December 31, 2022, totaled approximately $20.9
million (41.1% of sales), compared with approximately $17.5 million (38.5% of
sales) for the prior year.
Engineering and product development expenses for 2022 totaled approximately $9.6
million (18.8% of sales), compared with approximately $8.1 million (17.9% of
sales) for the prior year. The engineering expense of $9.6 million for 2022,
includes a one-time write-off of $646,000 of new product development components
that were not included in the final design of the BKR 9000 radio. Engineering
and product development expenses are primarily related to the continued design
and development of BKR Series, a new line of portable and mobile radios. These
development activities are the main focus of our engineering team. 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.
Marketing and selling expenses for the year ended December 31, 2022, totaled
approximately $4.4 million (8.6% of sales), compared with approximately $4.0
million (8.9% of sales) for the prior year. The increase in marketing and
selling expenses for the year are attributed to staff-related and other sales
and go-to-market expenses, which were partially offset by decreased commissions.
General and administrative expenses for the year ended December 31, 2022,
totaled approximately $6.9 million (13.6% of sales), compared with approximately
$5.4 million (11.7% of sales) for the prior year. The increase in general and
administrative expenses for the year is attributed primarily to corporate
management and headquarters related expenses.
Operating Loss
For the year ended December 31, 2022, our operating loss totaled approximately
$11.1 million (21.7% of sales), compared with operating loss of approximately
$1.2 million (2.6% of sales), for the prior year. The operating loss for the
year is attributed primarily to increased material and product development
costs, which adversely impacted gross profit margins, and increased general and
administrative expenses.
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Other (Expense) Income
Interest (Expense) Income
We recorded net interest expense of approximately $144,000 for the year ended
December 31, 2022, compared with approximately $53,000 for the prior year. Net
interest expense was attributed primarily to our credit facility and equipment
financing.
Gain/Loss on Investment
For the year ended December 31, 2022, we recognized a realized and unrealized
loss of approximately $313,000 on our investment in FG Financial Group, Inc.,
compared with an unrealized loss of approximately $219,000 for the prior year.
Income Tax/(Expense) Benefit
We recorded no income tax expense for the year ended December 31, 2022, compared
with income tax expense of $187,000 for the prior year.
Our income tax provision is based on the effective tax rate for the year. The
tax expense in any period may 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
fluctuations in the effective book tax rate (that is, tax expense divided by
pre-tax book income) from period to period.
As of December 31, 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.
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 $3,356,000. 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 December 31, 2022.
Liquidity and Capital Resources
For the year ended December 31, 2022, net cash used in operating activities
totaled approximately $9.0 million, compared with cash used by operating
activities of approximately $6.3 million for the prior year. Cash used in
operating activities for the year was primarily related to a net loss, increased
inventory, and increases in accounts receivable, which were partially offset by
increased accounts payable and depreciation and amortization.
For 2022, we had a net loss of approximately $11.6 million, compared with net
loss of approximately $1.7 million for the prior year. Net inventories increased
during the year ended December 31, 2022, by approximately $5.1 million, compared
with an increase of approximately $7.1 million for the prior year. The increase
was primarily attributable to extended supply-chain lead times, which impacted
material purchases and sales shipments, as well as material for planned new
product introductions. Accounts receivable increased approximately $2.4 million
during the year ended December 31, 2022, primarily due to the timing of sales
that were consummated later in the year that had not yet completed their
collection cycle. For the same period last year, accounts receivable increased
approximately $1.8 million. Accounts payable for the year ended December 31,
2022, increased approximately $7.0 million, compared with an increase of
approximately $0.8 million for the prior year, primarily due to the timing of
purchases and longer lead times for materials from suppliers. Depreciation and
amortization totaled approximately $1.4 million for the year ended December 31,
2022, compared with approximately $1.4 million for the prior year. Depreciation
and amortization are primarily related to manufacturing and engineering
equipment.
Cash used in investing activities for the year ended December 31, 2022, totaled
approximately $1.8 million, primarily for manufacturing and engineering related
equipment. For the prior year, cash used in investing activities totaled
approximately $2.3 million, primarily for purchases of engineering and
manufacturing related equipment.
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For the year ended December 31, 2022, cash of approximately $2.1 million was
provided by financing activities. During the year, we received proceeds of
approximately $9.7 million from the IPSA with Alterna, This was partially offset
by credit facility repayments of $5.3 million and loan repayments of
approximately $277,000. For the same period last year, we closed a public
offering of our common stock, generating net proceeds of approximately $11.6
million. During the year, we received proceeds of approximately $5.7 million
from our revolving credit facility and from financing related to the purchase of
manufacturing equipment, that was partially offset by loan repayments of
approximately $3.7 million. We used cash of approximately $2.0 million and $1.2
million to pay quarterly dividends for the years ended December 31, 2022 and
2021, respectively.
On November 22, 2022, the Company's Subsidiaries (BK Technologies, Inc. and RELM
Communications, Inc.) entered into an Invoice Purchase and Security Agreement
(the "IPSA") with Alterna Capital Solutions, LLC ("Alterna") for a one-year line
of credit with total maximum funding up to $15 million, with an interest rate of
Prime plus 1.85% and other monthly administrative fees. The IPSA line of credit
is an accounts receivable and inventory financing facility, with the borrowing
base of up to 85% of eligible accounts receivable and up to 75% of net orderly
liquidation value of inventory, not to exceed 100% of eligible accounts
receivable. The Company used the funds obtained from the IPSA to replace the
existing JPMC Credit Agreement described below and for working capital for the
business.
On January 13, 2020, BK Technologies, Inc., our wholly owned subsidiary, entered
into the $5 million Credit Agreement with JPMC. The Credit Agreement provided
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 have or were used for general corporate purposes. The line of
credit was 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., were guarantors of the obligations under the Credit Agreement, in
accordance with the terms of the Continuing Guaranty. As noted above, all
amounts owed under the Credit Agreement with JPMC were paid in full with
proceeds from the IPSA.
Borrowings under the JPMC Credit Agreement were to bear interest at the secured
overnight financing rate plus a margin of 2.0%. The line of credit was to be
repaid in monthly payments of interest only, payable in arrears, with all
outstanding principal and interest to be payable in full at maturity.
The JPMC Credit Agreement contained 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 contained one financial covenant
requiring BK Technologies, Inc., to maintain a tangible net worth of at least
$20 million at any fiscal quarter end.
The IPSA provides for the payment of fees by the Subsidiaries and includes
customary representations and warranties, indemnification provisions, covenants,
and events of default. Subject in some cases to cure periods, amounts
outstanding under the IPSA may be accelerated for typical defaults including,
but not limited to, the failure to make payments when due, the failure to
perform any covenant, the inaccuracy of representations and warranties, the
occurrence of debtor-relief proceedings, and the occurrence of unpermitted liens
against the purchased accounts receivable and collateral. The Subsidiaries have
granted Alterna a security interest in all of their respective personal property
to secure their obligations under the IPSA. The Subsidiaries entered into a
cross-guarantee, guaranteeing each other's obligations under the IPSA, and BK
also provided a guaranty of the Subsidiaries' obligations under the IPSA
As of December 31, 2022, and the date of filing this report, approximately $6.0
million and $5.6 in borrowings were outstanding under the IPSA, respectively.
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 $743,000 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 $16,000 beginning on May 8, 2021, matures on
April 8, 2025, and bears a fixed interest rate of 3.0%.
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Our cash and cash equivalents balance at December 31, 2022, was approximately
$1.9 million. We believe these funds, combined with anticipated cash generated
from operations and borrowing availability under our IPSA, 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 supply chain delays or interruptions, labor
shortages, wage pressures, rising inflation, geopolitical events, and other
force majeure events, such as 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 this report.
Recent Accounting Pronouncements
The Company does not discuss recent pronouncements that are not anticipated to
have an impact on or are unrelated to its financial condition, results of
operations, cash flows or disclosures.
Critical Accounting Policies and Estimates
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 determining the 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 twelve
months ended December 31, 2022.
Allowance for Collection of Trade Receivables
The allowance for doubtful accounts was approximately $50,000 on gross trade
receivables of approximately $10.7 million as of December 31, 2022, as compared
with $50,000 on gross trade receivables of approximately $8.3 million as of
December 31, 2021. This allowance is used to state trade receivables at a net
realizable value or the amount that we estimate will be collected on our gross
receivables as of December 31, 2022 and 2021. Because the amount that we will
actually collect on the receivables outstanding as of December 31, 2022 and 2021
cannot be known with certainty, we rely on prior experience. Our historical
collection losses have typically been infrequent, with write-offs of trade
receivables being significantly less than 1% of sales during past years.
Accordingly, we have maintained a general allowance of up to approximately 5% of
the gross trade receivables balance in order to allow for future collection
losses that arise from customer accounts that do not indicate the inability to
pay but turn out to have such an inability. Currently, our general allowance on
trade receivables is approximately 0.5% of gross receivables. As revenues and
total receivables increase, the allowance balance may also increase. We also
maintain a specific allowance for customer accounts that we know may not be
collectible due to various reasons, such as bankruptcy and other customer
liquidity issues. We analyze our trade receivables portfolio based on the age of
each customer's invoice. In this way, we can identify those accounts that are
more likely than not to have collection problems. We may reserve a portion or
all of the customer's balance. As of December 31, 2022 and 2021, we had no
specific allowance on trade receivables.
Slow Moving, Excess or Obsolete Inventory
The allowance for slow moving, excess or obsolete inventory was approximately
$1.2 million and $1.3 million at December 31, 2022 and 2021, respectively.
The allowance for slow-moving, excess, and obsolete inventory is used to state
our inventories at the lower of cost or net realizable value. Because the amount
of inventory that we will actually recoup through sales cannot be known with
certainty at any particular time, we rely on past sales experience, future sales
forecasts and our strategic business plans. Generally, in analyzing our
inventory levels, we classify inventory as having been used or unused during the
past year and establish an allowance based upon several factors, including, but
not limited to, business forecasts, inventory quantities and historical usage
profile. Supplemental to the aforementioned analysis, specific inventory items
are reviewed individually by management. Based on the review, considering
business levels, future prospects, new products and technology changes,
management, using its business judgment, may adjust the valuation of specific
inventory items to reflect an accurate valuation estimate. Management also
performs a determination of net realizable value for all finished goods with a
selling price below cost. For all such items, the inventory is valued at not
more than the selling price less cost, if any, to sell.
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Allowance for Product Warranty
We offer two-year standard warranties to our customers, depending on the
specific product and terms of the customer purchase agreement. Our typical
warranties require us to repair and replace defective products during the
warranty period at no cost to the customer. At the time the product revenue is
recognized, we record a liability for estimated costs under our warranties. The
costs are estimated based on historical experience. We periodically assess the
adequacy of our recorded liability for product warranties and adjust the amount
as necessary.
Income Taxes
We account for income taxes using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the enacted tax rates expected to
apply in the period in which the deferred tax asset or liability is expected to
be realized. The effect of changes in net deferred tax assets and liabilities is
recognized on our consolidated balance sheets and consolidated statements of
operations in the period in which the change is recognized. Valuation allowances
are provided to the extent that it is more likely than not that some portion, or
all, of deferred tax assets will not be realized. In determining whether a tax
asset is realizable, we consider, among other things, estimates of future
earnings based on information currently available, current and anticipated
customers, contracts and new product introductions, as well as recent operating
results and certain tax planning strategies. If we fail to achieve the future
results anticipated in the calculation and valuation of net deferred tax assets,
we may be required to increase the valuation allowance related to our deferred
tax assets in the future.
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