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, 2020, 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;
· 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;
· 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;
· our ability to manage our growth;
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· our ability to identify potential candidates and to consummate
acquisition, disposition or investment transactions, and risks incumbent
with being a noncontrolling interest stockholder in a corporation;
· the impact of general business conditions, including those resulting from
the COVID-19 pandemic, 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;
· 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. 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.
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, 2020, filed with the SEC on March 3, 2021.
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Executive Overview
BK Technologies Corporation is a holding company, with a wholly owned operating
subsidiary, BK Technologies, Inc. We design, manufacture and market two-way land
mobile radios, repeaters, base stations and related components and subsystems.
Two-way land mobile radios can be hand-held (portable) or installed in vehicles
(mobile). Repeaters expand the range of two-way land mobile radios, enabling
them to operate over a wider area. Base station components and subsystems are
installed at radio transmitter sites to improve performance by enhancing the
signal and reducing or eliminating signal interference and enabling the use of
one antenna for both transmission and reception. We incorporate both analog and
digital technologies in our products. Our digital technology is compliant with
the Project 25 standard of the Association of Public-Safety Communications
Officials. We offer products primarily under the "BK" brand name. Generally,
BK-branded products serve the government and public safety market.
Holding Company Reorganization
On March 28, 2019, we implemented a holding company reorganization. The
reorganization created a new holding company, BK Technologies Corporation, which
became the new parent company of BK Technologies, Inc. The holding company
reorganization was intended to create a more efficient corporate structure and
increase operational flexibility. We did not incur any material operational or
financial impacts. The holding company reorganization was effected through a
merger transaction that was a tax-free transaction for U.S. federal income tax
purposes for our stockholders. No stockholder vote was required to effect the
merger transaction.
As part of the holding company reorganization, stockholders of our predecessor,
BK Technologies, Inc., became stockholders of BK Technologies Corporation, on a
one-for-one basis, with the same number of shares and same ownership percentage
of common stock that they held immediately prior to the holding company
reorganization. Following the reorganization, BK Technologies Corporation
replaced BK Technologies, Inc. as the publicly traded entity, and shares of BK
Technologies Corporation were listed on the NYSE American under the symbol
"BKTI," which is the same symbol as previously used by BK Technologies, Inc. In
addition, the common stock of BK Technologies Corporation was assigned a new
CUSIP Number: 05587G 104.
For the purpose of this report, references to "we" or the "Company" or our
management or business at any period prior to the holding company reorganization
(March 28, 2019) refer to those of BK Technologies, Inc., as the predecessor
company and its subsidiaries and thereafter to those of BK Technologies
Corporation and its subsidiaries, except as otherwise specified or to the extent
the context otherwise indicates.
Impact of COVID-19 Pandemic
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.
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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 2020. For the
first nine months of 2021, the impact to our business, 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 longer delivery times within our supply
chain. While we cannot be certain of the progression or duration of these
shortages, 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, inventory levels,
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.
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.
Third Quarter and Nine months Summary
Customer demand and orders for our products were strong during the three months
ended September 30, 2021. 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 fourth quarter of 2021.
For the third quarter 2021, sales were materially flat compared with the third
quarter last year and increased 11.4% from the immediately preceding quarter.
The improvement in sales for the third quarter brought sales for the nine-months
ended September 30, 2021, within 3.2% of last year's nine-month period. Gross
profit margins as a percentage of sales for the third quarter and nine-month
periods of 2021 decreased compared with the same periods of last year, generally
reflecting cost increases in materials and freight, and a less favorable sales
mix. Selling, general and administrative ("SG&A") expenses for the nine-month
period ended September 30, 2021, decreased 1.7% from the same period last year.
For the third quarter of 2021, our sales totaled approximately $12.6 million,
compared with approximately $12.8 million for the same quarter last year. For
the nine months ended September 30, 2021, sales totaled approximately $32.5
million, compared with approximately $33.6 million for the same period last
year.
Gross profit margins as a percentage of sales for the third quarter of 2021 were
approximately 32.8%, compared with 41.6% (as adjusted) for the third quarter
last year. For the nine-month period ended September 30, 2021, gross profit
margins as a percentage of sales were approximately 35.7%, compared with 39.5%
(as adjusted) for the same period last year.
SG&A expenses for the third quarter of 2021 totaled approximately $4.5 million,
compared with approximately $4.2 million for the same quarter last year. SG&A
expenses for the first nine months of 2021 totaled approximately $13.0 million,
compared with approximately $13.3 million for the same period last year.
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For the third quarter of 2021, we recognized an operating loss of approximately
$370,000, compared with operating income of approximately $1.2 million (as
adjusted) for the same quarter last year. For the nine-month period ended
September 30, 2021, our operating loss totaled approximately $1.4 million (as
adjusted), compared with operating income of approximately $5,000 (as adjusted)
for the same period last year.
For the third quarter of 2021, we recognized an unrealized loss totaling
approximately $2.2 million on our investment in FGF Financial (formerly 1347
Property Insurance Holdings, Inc.), made through FGI 1347 Holdings, LP, a
consolidated variable interest entity. This compares with an unrealized loss of
approximately $291,000 on the investment for the third quarter last year. For
the nine-month period ended September 30, 2021, we recognized an unrealized gain
of approximately $310,000, compared with an unrealized loss of $797,000 for the
same period last year.
Net loss for the three months ended September 30, 2021, was approximately $2.6
million ($0.15 per basic and diluted share), compared with net income of
approximately $790,000 ($0.06 per basic and diluted share), (as adjusted), for
the same quarter last year. For the nine months ended September 30, 2021, our
net loss totaled approximately $1.4 million ($0.10 per basic and diluted share),
compared with a net loss of approximately $970,000 ($0.08 per basic and diluted
share), (as adjusted), for the same period last year.
As of September 30, 2021, working capital totaled approximately $25.6 million,
of which approximately $21.7 million was comprised of cash, cash equivalents and
trade receivables, reflecting the cash received from or closed public offering
of our common stock. As of December 31, 2020, working capital totaled
approximately $16.2 million (as adjusted), of which approximately $13.3 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 Percentage of Sales
Three Months Ended Nine months Ended
September 30, September 30, September 30, September 30,
2021 2020* 2021 2020 *
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of
products (67.2 ) (58.4 ) (64.3 ) (60.5 )
Gross margin 32.8 41.6 35.7 39.5
Selling,
general and
administrative
expenses (35.7 ) (32.6 ) (40.1 ) (39.5 )
Other
(expense)
income (17.4 ) (2.8 ) 0.7 (2.8 )
(Loss) income
before income
taxes (20.3 ) 6.2 (3.7 ) (2.8 )
Income tax
(expense)
benefit (0.0 ) (0.0 ) (0.6 ) (0.1 )
Net (loss)
income (20.3 )% 6.2 % (4.3 )% (2.9 )%
* The amounts for 2020 and the amounts prior to July 1, 2021, have been
adjusted to reflect the change in inventory accounting method, as described in
Notes 1 and 4 to Condensed Consolidated Financial Statements.
Net Sales
For the third quarter ended September 30, 2021, net sales totaled approximately
$12.6 million, compared with approximately $12.8 million for the same quarter
last year. Sales for the nine months ended September 30, 2021, totaled
approximately $32.5 million, compared with approximately $33.6 million for the
nine-month period last year.
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Customer demand and orders for our products were particularly strong during the
third quarter. Supply chain constraints limited our ability to manufacture the
quantities needed to convert the orders into shipments and sales revenue.
Accordingly, as of the end of the third quarter, these orders were carried in
backlog, and we anticipate fulfilling many of them during the fourth quarter of
2021. Although supply chain factors may continue to create delays during the
next several quarters, we anticipate being able to fulfill customer
requirements. The precise impact to sales and shipments for future quarters,
however, cannot be quantified.
Sales for the three and nine months ended September 30, 2021, was attributed
primarily to certain federal and state wildland fire and public safety agencies,
as well as demand from dealers. During the third quarter we realized increasing
sales of the BKR 5000, the first model in our new BKR Series of APCO Project 25
land mobile radio products and solutions that was launched in the second half of
2020.
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. 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.
Last year we reorganized our sales resources to focus more effectively on target
markets and customers where we can realize sales success. The current funnel of
sales prospects includes potential new customers in federal, state, and local
public safety agencies. We believe the reorganization and our sales funnel
better position us to capture new sales opportunities moving forward.
While the potential impacts of material shortages, lead-times and the COVID-19
pandemic 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,
operations, and financial results.
Cost of Products and Gross Profit Margin
Gross profit margins as a percentage of sales for the third quarter ended
September 30, 2021, were approximately 32.8%, compared with 41.6% (as adjusted)
for the same quarter last year. For the nine-month period ended September 30,
2021, gross profit margins were approximately 35.7%, compared with 39.5% (as
adjusted) 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 third quarter and nine months ended
September 30, 2021, decreased compared with the same period last year primarily
due to increased material and freight costs a less favorable mix of product
sales. For the nine-month period ended September 30, 2021, gross profit margins
also reflect one-time inventory reserves in earlier quarters related to our
legacy product line, the KNG series.
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 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.
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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, 2021, totaled
approximately $4.5 million (35.7% of sales), compared with approximately $4.2
million (32.6% of sales) for the same quarter last year. For the nine months
ended September 30, 2021, SG&A expenses decreased by $231,000, or 1.7%, to
approximately $13.0 million (40.1% of sales), compared with approximately $13.3
million (39.5% of sales), for the nine-month period last year.
Engineering and product development expenses for the third quarter of 2021
totaled approximately $2.0 million (16.1% of sales), compared with approximately
$2.0 million (15.8% of sales) for the same quarter of last year. For the nine
months ended September 30, 2021, engineering and product development expenses
totaled approximately $6.2 million (18.9% of sales), compared with approximately
$6.1 million (18.1% of sales) for the nine-month period last year. Engineering
expenses for both periods were comparable with the same periods last year.
Expenses for the design and development of the BKR series, a new line of
portable and mobile radios, has continued with most ongoing development being
performed by our internal engineering team. Development of the BKR Series is the
primary 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 third quarter of 2021 totaled
approximately $1.0 million (8.2% of sales), compared with approximately $0.9
million (7.3% of sales) for the third quarter last year, primarily reflecting
increased commissions attributed to sales growth. For the nine months ended
September 30, 2021, marketing and selling expenses declined approximately
$346,000, or 10.2%, to approximately $3.0 million (9.4% of sales), compared with
approximately $3.4 million (10.1% of sales). The decreases for the nine-month
period are attributed to reductions in sales and go-to-market employment, as
well as other sales, marketing, and go-to-market related expenses.
Other general and administrative expenses for the third quarter 2021 totaled
approximately $1.4 million (11.4% of sales), compared with approximately $1.2
million (9.6% of sales) for the same quarter last year. For the nine months
ended September 30, 2021, general and administrative expenses totaled
approximately $3.8 million (11.8% of sales), compared with approximately $3.8
million (11.4% of sales) for the nine-month period last year. Other general and
administrative expenses for both periods last year included severance and
expenses related to employment reductions.
Operating Loss
The operating loss for the third quarter ended September 30, 2021, totaled
approximately $370,000 (2.9% of sales), compared with operating income of
approximately $1.2 million (9.0% of sales), (as adjusted), for last year's third
quarter. For the nine months ended September 30, 2021, our operating loss
totaled approximately $1.4 million (4.4% of sales), compared with operating
income of approximately $5,000 (0.0% of sales) (as adjusted) for the nine-month
period last year. The operating loss for the first nine months is attributed
primarily to sales mix combined with increased material costs, which adversely
impacted gross profit margins. These factors were partially offset by SG&A
expense reductions.
Other (Expense) Income
We recorded net interest expense of approximately $19,000 for the third quarter
ended September 30, 2021, compared with approximately $6,000 for the third
quarter of last year. For the nine months ended September 30, 2021, net interest
expense totaled approximately $37,000, compared with approximately $4,000 for
the nine-month period last year. Net interest expense was primarily the result
of lower average cash balances and equipment financing.
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For the third quarter ended September 30, 2021, we recognized an unrealized loss
of approximately $2.2 million on our investment in FGF, compared with an
unrealized loss of approximately $291,000 for the third quarter last year. For
the nine months ended September 30, 2021, we recognized an unrealized gain of
approximately $310,000 on our investment in FGF, compared with an unrealized
loss of approximately $797,000 for the same period last year.
Income Taxes
We recorded an income tax expense of $0 and $184,000 for the three and nine
months ended September 30, 2021, compared with income tax expense of $2,000 and
$30,000 for the same 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, 2021, 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 $98,000. 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 September 30, 2021.
Liquidity and Capital Resources
For the nine months ended September 30, 2021, net cash used in operating
activities totaled approximately $3.6 million, compared with cash provided by
operating activities of approximately $3.5 million (as adjusted) for the same
period last year. Cash used in operating activities for the nine months ended
September 30, 2021, was primarily related to a net loss, increased inventory,
increases in accounts receivable, and an unrealized gain on securities, which
were partially offset by increased accounts payable and depreciation and
amortization.
For the first nine months of 2021, we had a net loss of approximately $1.4
million, compared with a net loss of approximately $1.0 million (as adjusted)
for the same period last year. Gross inventories increased during the nine
months ended September 30, 2021, by approximately $6.1 million (as adjusted),
compared with a decrease of approximately $5.1 million (as adjusted) for the
same period last year. The increase for the nine-month period was primarily
attributable to extended supplier lead-times and planned new product
introductions. Accounts receivable increased approximately $1.2 million during
the nine months ended September 30, 2021, primarily due to the timing of sales
that were consummated later in the quarter that had not yet completed their
collection cycle. For the same period last year, accounts receivable increased
approximately $1.8 million. The unrealized gain on securities for the nine
months ended September 30, 2021, totaled approximately $310,000, compared with
an unrealized loss of approximately $797,000 for the same period last year. For
additional information pertaining to our investment in securities, refer to Note
1 (Condensed Consolidated Financial Statements) and Note 6 (Investment in
Securities) to the condensed consolidated financial statements included in this
report. Accounts payable for the nine months ended September 30, 2021, increased
approximately $2.4 million, compared with a decrease of approximately $2.2
million for the same period last year, primarily due to purchases from
suppliers. Depreciation and amortization totaled approximately $1.0 million for
the nine months ended September 30, 2021, compared with approximately $1.0
million for the same period last year. Depreciation and amortization are
primarily related to manufacturing and engineering equipment.
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Cash used in investing activities for the nine months ended September 30, 2021,
totaled approximately $1.9 million, primarily for manufacturing equipment. For
the same period last year, cash used in investing activities totaled
approximately $742,000, primarily for engineering and manufacturing related
equipment.
For the nine months ended September 30, 2021, cash of approximately $12.8
million was provided by financing activities. In June we closed a public
offering of our common stock, generating net proceeds of approximately $11.6
million. During the nine months ended September 30, 2021, we received proceeds
of approximately $3.5 million from our revolving credit facility and from
financing related to the purchase of manufacturing equipment. This was partially
offset by loan repayments of approximately $1.5 million. For the same period
last year, we received proceeds totaling approximately $2.2 million under the
Paycheck Protection Program, which were repaid in full within the same period.
We used cash of approximately $836,000 and $752,000 to pay quarterly dividends
for the nine months ended September 30, 2021and 2020, respectively. During the
first quarter of 2020, we also used approximately $269,000 for stock
repurchases.
On January 26, 2021, our revolving credit facility, which originated on January
30, 2020, was extended for one year, through January 31, 2022.
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 a rate per annum
equal to one-month LIBOR (or zero if the LIBOR is less than zero) plus a margin
of 1.90%. The line of credit is 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 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, 2021, and the date of filing this report. As of
September 30, 2021, and the date of filing this report, approximately $1.5
million in borrowings were outstanding 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 $743,000 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 September 30, 2021, was approximately
$14.1 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, 2020, and "Item 1A. Risk Factors" below in this
report.
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.
Except as discussed below under "Change in Accounting Principle", there were no
changes to our critical accounting policies during the quarter ended September
30, 2021, as described in Item 7 of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2020.
Change in Accounting Principle
As disclosed in Note 1 and 4, on July 1, 2021, we changed inventory accounting
to burden the material at the time of purchase receipts. Prior to July 1, 2021,
we applied the material burden at the time the inventory was issued to work in
progress. This change resulted in a net increase of approximately $1.3 million
in inventory and retained earnings.
The accounting change did not have a material effect on the loss from
operations, net loss, or earnings per share for the three and nine months ended
September 30, 2021.
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