bkti_10q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended June 30,
2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _________ to _________
Commission
file number 001-32644
BK TECHNOLOGIES CORPORATION
(Exact
name of registrant as specified in its charter)
|
Nevada
|
83-4064262
|
|
(State
or other jurisdiction of
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(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
7100 Technology Drive
West Melbourne, Florida 32904
(Address
of principal executive offices and Zip Code)
Registrant’s
telephone number, including area code: (321) 984-1414
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class
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|
Trading
Symbol(s)
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Name of
Each Exchange on Which Registered
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Common
Stock, par value $.60 per share
|
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BKTI
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NYSE
American
|
Indicate by check
mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
☑ No ☐
Indicate by check
mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☑ No
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer
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☐
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Accelerated
filer
|
☐
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|
Non-accelerated
filer
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☑
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Smaller
reporting company
|
☑
|
|
|
|
Emerging
growth company
|
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ☐ No ☑
There
were 12,493,420 shares of common stock, $0.60 par value, of the
registrant outstanding at August 2, 2020.
TABLE OF CONTENTS
PART I - FINANCIAL
INFORMATION
BK TECHNOLOGIES CORPORATION
Condensed Consolidated Balance Sheets
(In
thousands, except share data)
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|
|
|
|
|
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|
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ASSETS
|
|
|
|
|
|
|
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Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$6,939
|
$4,676
|
|
Trade accounts
receivable, net
|
3,583
|
3,964
|
|
Inventories,
net
|
9,527
|
13,513
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|
Prepaid expenses
and other current assets
|
1,408
|
1,733
|
|
Total current
assets
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21,457
|
23,886
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|
|
|
|
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Property, plant and
equipment, net
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3,828
|
3,964
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|
Right-of-use (ROU)
asset
|
2,709
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2,885
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Investment in
securities
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2,129
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2,635
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Deferred tax
assets, net
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4,344
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4,373
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|
Other
assets
|
143
|
197
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Total
assets
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$34,610
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$37,940
|
|
|
|
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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|
|
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Current
liabilities:
|
|
|
|
Accounts
payable
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$4,472
|
$5,310
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|
Accrued
compensation and related taxes
|
940
|
1,271
|
|
Accrued warranty
expense
|
911
|
1,248
|
|
Accrued other
expenses and other current liabilities
|
385
|
479
|
|
Dividends
payable
|
250
|
252
|
|
Short-term lease
liability
|
417
|
369
|
|
Note
payable-current portion
|
80
|
78
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|
Deferred
revenue
|
556
|
369
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|
Total current
liabilities
|
8,011
|
9,376
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|
|
|
|
|
Note payable, net
of current portion
|
289
|
328
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|
Long-term lease
liability
|
2,426
|
2,606
|
|
Deferred
revenue
|
2,724
|
2,354
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|
Total
liabilities
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13,450
|
14,664
|
|
Commitments and
contingencies
|
|
|
|
Stockholders’
equity:
|
|
|
|
Preferred stock;
$1.00 par value; 1,000,000 authorized shares; none issued or
outstanding
|
—
|
—
|
|
Common stock; $.60
par value; 20,000,000 authorized shares; 13,943,820 and 13,929,381
issued and 12,493,420 and 12,596,923 outstanding shares at June 30,
2020 and December 31, 2019, respectively
|
8,366
|
8,357
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|
Additional paid-in
capital
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26,235
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26,095
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|
Accumulated
deficit
|
(8,039)
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(6,043)
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Treasury stock, at
cost, 1,450,400 and 1,332,458 shares at June 30, 2020 and December
31, 2019, respectively
|
(5,402)
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(5,133)
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Total
stockholders’ equity
|
21,160
|
23,276
|
|
Total liabilities
and stockholders’ equity
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$34,610
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$37,940
|
See notes to condensed consolidated financial
statements.
1
BK TECHNOLOGIES CORPORATION
Condensed Consolidated Statements of Operations
(In
thousands, except share and per share data) (Unaudited)
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|
|
|
|
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|
|
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Sales,
net
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$9,937
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$13,294
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$20,826
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$20,938
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|
Expenses
|
|
|
|
|
|
Cost of
products
|
5,609
|
7,593
|
12,603
|
12,800
|
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Selling, general
and administrative
|
4,364
|
5,681
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9,107
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10,436
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|
Total
expenses
|
9,973
|
13,274
|
21,710
|
23,236
|
|
|
|
|
|
|
|
Operating (loss)
income
|
(36)
|
20
|
(884)
|
(2,298)
|
|
|
|
|
|
|
|
Other (expense)
income:
|
|
|
|
|
|
Net interest
(expense) income
|
(6)
|
46
|
3
|
101
|
|
(Loss) gain on
investment in securities
|
(200)
|
(148)
|
(506)
|
444
|
|
Other
expense
|
(32)
|
(11)
|
(79)
|
(13)
|
|
Total other
(expense) income
|
(238)
|
(113)
|
(582)
|
532
|
|
|
|
|
|
|
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Loss before income
taxes
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(274)
|
(93)
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(1,466)
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(1,766)
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|
|
|
|
|
|
|
Income tax
(expense) benefit
|
(28)
|
(154)
|
(28)
|
201
|
|
|
|
|
|
|
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Net
loss
|
$(302)
|
$(247)
|
$(1,494)
|
$(1,565)
|
|
|
|
|
|
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Net loss per
share-basic and diluted:
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$(0.02)
|
$(0.02)
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$(0.12)
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$(0.12)
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|
Weighted average
shares outstanding-basic
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12,495,707
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12,720,112
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12,525,407
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12,740,798
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Weighted average
shares outstanding-diluted
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12,495,707
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12,720,112
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12,525,407
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12,740,798
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See notes to condensed consolidated financial
statements.
2
BK TECHNOLOGIES CORPORATION
Condensed Consolidated Statements of Cash Flows
(In
thousands) (Unaudited)
|
|
|
|
|
|
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Operating
activities
|
|
|
|
Net
loss
|
$(1,494)
|
$(1,565)
|
|
Adjustments to
reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
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Inventories
allowances
|
72
|
49
|
|
Deferred tax
expense (benefit)
|
28
|
(164)
|
|
Depreciation and
amortization
|
661
|
575
|
|
Share-based
compensation expense-stock options
|
60
|
68
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|
Share-based
compensation expense-restricted stock units
|
89
|
74
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|
Loss (gain) loss on
investment in securities
|
506
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(444)
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|
Changes in
operating assets and liabilities:
|
|
|
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Trade accounts
receivable
|
381
|
628
|
|
Inventories
|
3,914
|
(1,840)
|
|
Prepaid expenses
and other current assets
|
325
|
269
|
|
Other
assets
|
54
|
(4)
|
|
Lease
liability
|
44
|
—
|
|
Accounts
payable
|
(838)
|
1,246
|
|
Accrued
compensation and related taxes
|
(331)
|
(691)
|
|
Accrued warranty
expense
|
(337)
|
(106)
|
|
Deferred
revenue
|
557
|
417
|
|
Accrued other
expenses and other current liabilities
|
(94)
|
155
|
|
Net
cash provided by (used in) operating activities
|
3,597
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(1,333)
|
|
|
|
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Investing
activities
|
|
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Purchases of
property, plant and equipment
|
(525)
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(1,462)
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Net
cash used in investing activities
|
(525)
|
(1,462)
|
|
|
|
|
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Financing
activities
|
|
|
|
Proceeds from
issuance of common stock
|
—
|
2
|
|
Cash dividends
declared and paid
|
(502)
|
(510)
|
|
Repurchase of
common stock
|
(269)
|
(550)
|
|
Proceeds from
debt
|
2,196
|
—
|
|
Repayment of
debt
|
(2,234)
|
—
|
|
Net
cash used in financing activities
|
(809)
|
(1,058)
|
|
|
|
|
|
Net change in cash
and cash equivalents
|
2,263
|
(3,853)
|
|
Cash and cash
equivalents, beginning of period
|
4,676
|
11,268
|
Cash and cash
equivalents, end of period
|
$6,939
|
$7,415
|
|
|
|
|
|
Supplemental
disclosure
|
|
|
|
Cash paid for
interest
|
$11
|
$—
|
|
Non-cash
financing activity
|
|
|
|
Common stock issued
under restricted stock units
|
$56
|
$140
|
See notes to condensed consolidated financial
statements.
3
BK TECHNOLOGIES CORPORATION
Notes to Condensed Consolidated Financial Statements
Unaudited
(In thousands, except share and per share data and
percentages)
1.
Condensed
Consolidated Financial Statements
Basis of Presentation
The
condensed consolidated balance sheet as of June 30, 2020, the
condensed consolidated statements of operations for the three and
six months ended June 30, 2020 and 2019, and the condensed
consolidated statements of cash flows for the six months ended June
30, 2020 and 2019 have been prepared by BK Technologies Corporation
(the “Company” or “we”), and are unaudited.
On March 28, 2019, BK Technologies, Inc., the predecessor of BK
Technologies Corporation, implemented a holding company
reorganization, which resulted in BK Technologies Corporation
becoming the direct parent company of, and the successor issuer to,
BK Technologies, Inc. For the purpose of this report, references to
“we” or the “Company” or its 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. In the opinion of management, all adjustments, which
include normal, recurring adjustments, necessary for a fair
presentation have been made. All intercompany transactions and
balances have been eliminated in consolidation. The condensed
consolidated balance sheet at December 31, 2019 has been derived
from the Company’s audited consolidated financial statements
at that date.
Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S.
GAAP”) have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2019, as filed with the
Securities and Exchange Commission (“SEC”). The results
of operations for the three and six months ended June 30, 2020 are
not necessarily indicative of the operating results for a full
year.
The
Company periodically reviews its revenue recognition procedures to
assure that such procedures are in accordance with GAAP. Surcharges
collected on certain sales to government customers and remitted to
governmental agencies are not included in revenues or in costs and
expenses.
Principles of Consolidation
The
Company consolidates entities in which it has a controlling
financial interest. The Company determines whether it has a
controlling financial interest in an entity by first evaluating
whether the entity is a variable interest entity
(“VIE”) or a voting interest entity.
VIEs
are entities in which (i) the total equity investment at risk is
not sufficient to enable the entity to finance its activities
independently, or (ii) the at-risk equity holders do not have the
normal characteristics of a controlling financial interest. A
controlling financial interest in a VIE is present when an
enterprise has one or more variable interests that have both (i)
the power to direct the activities of the VIE that most
significantly impact the VIE’s economic performance, and (ii)
the obligation to absorb losses of the VIE or the right to receive
benefits from the VIE that could potentially be significant to the
VIE. The enterprise with a controlling financial interest is the
primary beneficiary and consolidates the VIE.
Voting
interest entities lack one or more of the characteristics of a VIE.
The usual condition for a controlling financial interest is
ownership of a majority voting interest for a corporation or a
majority of kick-out or participating rights for a limited
partnership.
When
the Company does not have a controlling financial interest in an
entity but exerts significant influence over the entity’s
operating and financial policies (generally defined as owning a
voting or economic interest of between 20% to 50%), the
Company’s investment is accounted for under the equity method
of accounting. If the Company does not have a controlling financial
interest in, or exert significant influence over, an entity, the
Company accounts for its investment at fair value, if the fair
value option was elected, or at cost.
The
Company has an investment in 1347 Property Insurance Holdings,
Inc., made through FGI 1347 Holdings, LP, a consolidated
VIE.
Fair Value
The
Company’s financial instruments consist of cash and cash
equivalents, trade accounts receivable, investment in securities,
accounts payable, accrued expenses, notes payable, and other
liabilities. As of June 30, 2020 and December 31, 2019, the
carrying amount of cash and cash equivalents, trade accounts
receivable, accounts payable, accrued expenses, notes payable, and
other liabilities approximated their respective fair value due to
the short-term nature and maturity of these
instruments.
The
Company uses observable market data assumptions (Level 1 inputs, as
defined in accounting guidance) that it believes market
participants would use in pricing investment in
securities.
Recently Adopted Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board
(“FASB”) issued ASU 2016-02 “Leases,” which
amended leasing guidance by requiring companies to recognize a
right-of-use (“ROU”) asset and a lease liability for
all operating and capital (finance) leases with lease terms greater
than twelve months. The lease liability is equal to the present
value of lease payments. The lease asset is based on the lease
liability, subject to adjustment, such as for initial direct costs.
For income statement purposes, leases continue to be classified as
operating or capital (finance), with lease expense in both cases
calculated substantially the same as under the prior leasing
guidance. The updated guidance became effective for interim and
annual periods beginning after December 15, 2018. The Company
adopted the new guidance on January 1, 2019. Adoption resulted in
the recognition of ROU assets and lease liabilities on the
condensed consolidated financial statements. Refer to Note 12
(Leases) for further details on leases.
In
August 2018, the FASB issued ASU 2018-13, “Disclosure
Framework–Changes to the Disclosure Requirements for Fair
Value Measurement,” which modifies the disclosure
requirements on fair value measurements in Topic 820, Fair Value
Measurement, including the removal of certain disclosure
requirements. The amendments in the ASU are effective for all
entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption is
permitted upon issuance of the ASU. The Company adopted this
guidance as of January 1, 2020, and the adoption did not have an
impact on its consolidated financial statements.
Recent Accounting Pronouncements
The
Company does not discuss recent pronouncements that are not
anticipated to have a material impact on or are unrelated to its
financial condition, results of operations, cash flows or
disclosures.
2.
Significant
Events and Transactions
Pursuant to the
Company’s capital return program, the Company’s Board
of Directors declared a quarterly dividend of $0.02 per share of
the Company’s common stock on June 10, 2020 to stockholders
of record as of July 6, 2020. These dividends were paid on July 20,
2020.
In May
2020, the Company announced that its operating subsidiary received
orders totaling approximately $1,400 from the U.S. Forest Service.
The orders were for KNG-Series Digital P-25 portable radios, mobile
radios and base stations with related accessories, and were
fulfilled during the second quarter of 2020.
In May
2020, the Company implemented workforce reductions of approximately
18% to reduce costs and to better position the Company in an
uncertain business environment resulting from the COVID-19
pandemic. The Company incurred approximately $221 in severance
costs relating to these workforce reductions, which were recognized
in the second quarter of 2020 and will be paid according to the
Company’s normal payroll practices through September
2020.
In April 2020, BK Technologies, Inc., a
wholly-owned operating subsidiary of the Company, received approval
and funding pursuant to a promissory note evidencing an unsecured
loan in the amount of approximately $2,196 (the “Loan”)
under the Paycheck Protection Program (or “PPP”). The
PPP was established under the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”) and is administered by
the U.S. Small Business Administration (“SBA”).
The Company intended to use the Loan for qualifying expenses in
accordance with the terms of the CARES Act. At the time the Company
applied for the Loan, it believed it qualified to receive the funds
pursuant to the PPP. Subsequently, the SBA, in consultation with
the Department of Treasury, issued new guidance that created
uncertainty regarding the qualification requirements for a PPP
loan. In April 2020, out of an abundance of caution, the Company
repaid the loan in full.
In December 2019, a novel strain of the
coronavirus (“COVID-19”) surfaced in Wuhan, China,
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 as
the first half of 2020 progressed, and the Company anticipates the
effects of COVID-19 will continue to have an adverse impact on the
Company going forward. In response to COVID-19, national and local
governments around the world have 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. In response to
the COVID-19 pandemic, the Company has undertaken certain measures
in an effort to mitigate the impact of the COVID-19 pandemic on the
Company, including implementing employee safety measures and taking
steps to reduce expenses, including workforce reductions. The
ultimate impact of COVID-19 on the Company’s business,
results of operations, financial condition and cash flows is
dependent on future developments, including the duration of the
pandemic, including whether there is a “second wave,”
and the related length of its impact on the global economy, which
are uncertain and, given the daily evolution of the COVID-19
pandemic and the global responses to curb its spread, cannot be
predicted at this time. Even after the COVID-19 pandemic has
subsided, the Company may continue to experience an adverse impact
to its business as a result of the pandemic’s national and,
to some extent, global economic impact, including any recession
that has occurred or may occur in the future.
3.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts on trade receivables was
approximately $50 on gross trade receivables of $3,633 and $4,014
at June 30, 2020 and December 31, 2019, respectively. This
allowance is used to state trade receivables at a net realizable
value or the amount that the Company estimates will be collected of
the Company’s gross trade receivables.
The
components of inventories, net of allowances for slow-moving,
excess or obsolete inventory, consisted of the
following:
|
|
|
|
|
Finished
goods
|
$2,781
|
$3,864
|
|
Work in
process
|
3,242
|
6,122
|
|
Raw
materials
|
3,504
|
3,527
|
|
|
$9,527
|
$13,513
|
Allowances for
slow-moving, excess, or obsolete inventory are used to state the
Company’s inventories at the lower of cost or net realizable
value. The allowances were approximately $466 at June 30, 2020,
compared with approximately $823 at December 31, 2019.
The
Company has recorded an income tax expense of $28 derived from the
change in valuation allowance related to net operating loss
carryforwards for the state of Florida that are anticipated to
expire unutilized in 2020 for the three and six months ended June
30, 2020, compared with an income tax expense of approximately $154
for the three months ended June 30, 2019, and an income tax benefit
of approximately $201 for the six months ended June 30,
2019.
The
Company’s 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, the Company 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
June 30, 2020, the Company’s net deferred tax assets totaled
approximately $4,344 and were primarily derived from research and
development tax credits, deferred revenue, and net operating loss
carryforwards.
In
order to fully utilize the net deferred tax assets, the Company
will need to generate sufficient taxable income in future years.
The Company analyzed all positive and negative evidence to
determine if, based on the weight of available evidence, it is 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 the Company’s 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 the analysis of all available evidence, both positive and
negative, the Company has concluded that it does not have the
ability to generate sufficient taxable income in the necessary
period to utilize the entire benefit for the deferred tax assets.
Accordingly, the Company established a valuation allowance of $28
related to state of Florida net operating loss carryforwards that
are anticipated to expire unutilized in 2020. The Company cannot
presently estimate what, if any, changes to the valuation of its
deferred tax assets may be deemed appropriate in the future. If the
Company incurs future losses, it may be necessary to record
additional valuation allowance related to the deferred tax assets
recognized as of June 30, 2020.
6.
Investment
in Securities
The
Company has an investment in a limited partnership, FGI 1347
Holdings, LP, of which the Company is the sole limited partner. FGI
1347 Holdings, LP was established for the purpose of investing in
securities.
As
of June 30, 2020, the Company indirectly held approximately $146 in
cash and 477,282 shares of 1347 Property Insurance Holdings, Inc.
(Nasdaq: PIH) with fair value of $2,129, through an investment in
FGI 1347 Holdings, LP. These shares were purchased in March and May
2018 for approximately $3,741. For the three months ended June 30,
2020, the Company recognized an unrealized loss on the investment
of approximately $200, compared with an unrealized loss of $148 for
the same period last year. For the six months ended June 30, 2020,
the Company recognized an unrealized loss on the investment of
approximately $506, compared with an unrealized gain of $444 for
the same period last year.
Affiliates
of Fundamental Global Investors, LLC serve as the general partner
and the investment manager of FGI 1347 Holdings, LP, and the
Company is the sole limited partner. As of June 30, 2020, the
Company and the affiliates of Fundamental Global Investors, LLC,
including, without limitation, Ballantyne Strong, Inc.,
beneficially owned in the aggregate 3,042,593 shares of PIH’s
common stock, including 100,000 shares of common stock subject to a
call option, representing approximately 50.1% of PIH’s
outstanding shares. In addition, Capital Wealth Advisors, Inc., an
affiliate of Fundamental Global, held 64,710 shares of PIH’s
common stock for the accounts of individual investors, which
represents approximately 1.1% of PIH’s outstanding shares.
Fundamental Global with its affiliates is the largest stockholder
of the Company. Mr. Kyle Cerminara, a director of the Company, is
Chief Executive Officer, Co-Founder and Partner of Fundamental
Global Investors, LLC and serves as Chairman of the Board of
Directors of Ballantyne Strong and of PIH. Mr. Lewis M. Johnson, a
director of the Company, is President, Co-Founder and Partner of
Fundamental Global Investors, LLC and serves as Co-Chairman of the
Board of Directors of Ballantyne Strong and of PIH. Mr. John
Struble, the Chairman of the Company’s Board of Directors,
serves as a consultant to an affiliate of Fundamental Global
Investors, LLC.
The
changes in condensed consolidated stockholders’ equity for
the three and six months ended June 30, 2020 and 2019 are as
follows:
|
|
|
|
Additional Paid-In Capital
|
Accumulated
Deficit
|
Treasury Stock
|
|
|
Balance at December
31, 2018
|
13,882,937
|
$8,330
|
$25,867
|
$(2,393)
|
$(4,092)
|
$27,712
|
|
Stock options
exercised and issued
|
1,000
|
—
|
2
|
—
|
—
|
2
|
|
Share-based
compensation expense-stock options
|
—
|
—
|
31
|
—
|
—
|
31
|
|
Share-based
compensation expense-restricted stock units
|
—
|
—
|
41
|
—
|
—
|
41
|
|
Common stock
dividends ($0.02 per share)
|
—
|
—
|
—
|
(254)
|
—
|
(254)
|
|
Net
loss
|
—
|
—
|
—
|
(1,318)
|
—
|
(1,318)
|
|
Repurchase of
common stock
|
—
|
—
|
—
|
—
|
(337)
|
(337)
|
|
Balance at March
31, 2019
|
13,883,937
|
8,330
|
25,941
|
(3,965)
|
(4,429)
|
25,877
|
|
Common stock issued
under restricted stock units
|
38,353
|
23
|
(23)
|
—
|
—
|
—
|
|
Share-based
compensation expense-stock options
|
—
|
—
|
37
|
—
|
—
|
37
|
|
Share-based
compensation expense-restricted stock units
|
—
|
—
|
33
|
—
|
—
|
33
|
|
Common stock
dividends ($0.02 per share)
|
—
|
—
|
—
|
(255)
|
—
|
(255)
|
|
Net
loss
|
—
|
—
|
—
|
(247)
|
—
|
(247)
|
|
Repurchase of
common stock
|
—
|
—
|
—
|
—
|
(213)
|
(213)
|
|
Balance at June 30,
2019
|
13,922,290
|
$8,353
|
$25,988
|
$(4,467)
|
$(4,642)
|
$25,232
|
|
|
|
|
Additional Paid-In Capital
|
Accumulated
Deficit
|
Treasury Stock
|
|
|
Balance at December
31, 2019
|
13,929,381
|
$8,357
|
$26,095
|
$(6,043)
|
$(5,133)
|
$23,276
|
|
Common stock issued
under restricted stock units
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Share-based
compensation expense-stock options
|
—
|
—
|
30
|
—
|
—
|
30
|
|
Share-based
compensation expense-restricted stock units
|
—
|
—
|
21
|
—
|
—
|
21
|
|
Common stock
dividends ($0.02 per share)
|
—
|
—
|
—
|
(250)
|
—
|
(250)
|
|
Net
loss
|
—
|
—
|
—
|
(1,192)
|
—
|
(1,192)
|
|
Repurchase of
common stock
|
—
|
—
|
—
|
—
|
(243)
|
(243)
|
|
Balance at March
31, 2020
|
13,929,381
|
8,357
|
26,146
|
(7,485)
|
(5,376)
|
21,642
|
|
Common stock issued
under restricted stock units
|
14,439
|
9
|
(9)
|
—
|
—
|
—
|
|
Share-based
compensation expense-stock options
|
—
|
—
|
30
|
—
|
—
|
30
|
|
Share-based
compensation expense-restricted stock units
|
—
|
—
|
68
|
—
|
—
|
68
|
|
Common stock
dividends ($0.02 per share)
|
—
|
—
|
—
|
(252)
|
—
|
(252)
|
|
Net
loss
|
—
|
—
|
—
|
(302)
|
—
|
(302)
|
|
Repurchase of
common stock
|
—
|
—
|
—
|
—
|
(26)
|
(26)
|
|
Balance at June 30,
2020
|
13,943,820
|
$8,366
|
$26,235
|
$(8,039)
|
$(5,402)
|
$21,160
|
The
following table sets forth the computation of basic and diluted
loss per share:
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net loss (for basic
and diluted loss per share)
|
$(302)
|
$(247)
|
$(1,494)
|
$(1,565)
|
|
Denominator for
basic loss per share weighted average shares
|
12,495,707
|
12,720,112
|
12,525,407
|
12,740,798
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
Options and
restricted stock units
|
—
|
—
|
—
|
—
|
|
Denominator for
diluted loss per share weighted average shares
|
12,495,707
|
12,720,112
|
12,525,407
|
12,740,798
|
|
Basic loss per
share
|
$(0.02)
|
$(0.02)
|
$(0.12)
|
$(0.12)
|
|
Diluted loss per
share
|
$(0.02)
|
$(0.02)
|
$(0.12)
|
$(0.12)
|
Approximately
510,900 stock options and 0 restricted stock units for the three
and six months ended June 30, 2020, and 564,500 stock options and
116,667 restricted stock units for the three and six months ended
June 30, 2019, were excluded from the calculation because they were
anti-dilutive.
9.
Non-Cash
Share-Based Employee Compensation
The
Company has an employee and non-employee director share-based
incentive compensation plan. Related to these programs, the Company
recorded non-cash share-based employee compensation expense of $30
and $60 for the three and six months ended June 30, 2020,
respectively, compared with $37 and $68, respectively, for the same
periods last year. The Company considers its non-cash share-based
employee compensation expenses as a component of cost of products
and selling, general and administrative expenses. There was no
non-cash share-based employee compensation expense capitalized as
part of capital expenditures or inventory for the periods
presented.
The
Company uses the Black-Scholes-Merton option valuation model to
calculate the fair value of stock option grants under this plan.
The non-cash share-based employee compensation expense recorded in
the three and six months ended June 30, 2020 was calculated using
certain assumptions. Such assumptions are described more
comprehensively in Note 10 (Share-Based Employee Compensation) of
the Notes to the Company’s consolidated financial statements
included in its Annual Report on Form 10-K for the fiscal year
ended December 31, 2019.
A
summary of activity under the Company’s stock option plans
during the six months ended June 30, 2020 is presented
below:
|
As
of January 1, 2020
|
|
Wgt. Avg. Exercise Price ($) Per
Share
|
Wgt. Avg. Remaining Contractual Life
(Years)
|
Wgt. Avg. Grant Date Fair Value ($) Per
Share
|
Aggregate Intrinsic Value
($)
|
|
Outstanding
|
569,500
|
4.16
|
6.82
|
1.75
|
24,000
|
|
Vested
|
214,800
|
4.12
|
4.20
|
1.95
|
24,000
|
|
Nonvested
|
354,700
|
4.18
|
8.40
|
1.63
|
—
|
|
|
|
|
|
|
|
|
Period
activity
|
|
|
|
|
|
|
Issued
|
110,000
|
3.24
|
—
|
1.27
|
—
|
|
Exercised
|
—
|
—
|
—
|
—
|
—
|
|
Forfeited
|
103,600
|
4.12
|
—
|
1.71
|
—
|
|
Expired
|
65,000
|
4.07
|
—
|
2.88
|
—
|
|
|
|
|
|
|
|
|
As
of June 30, 2020
|
|
|
|
|
|
|
Outstanding
|
510,900
|
3.98
|
7.65
|
1.51
|
45,500
|
|
Vested
|
190,300
|
4.21
|
5.95
|
1.54
|
29,000
|
|
Nonvested
|
320,600
|
3.85
|
8.67
|
1.50
|
16,500
|
Restricted Stock Units
On
September 6, 2019, the Company granted to each non-employee
director restricted stock units with a grant-date fair value of $40
per award (resulting in total aggregate grant-date fair value of
$280), which will vest in five equal, annual installments beginning
with the first anniversary of the grant date, subject to the
director’s continued service through such date, provided
that, if the director makes himself available and consents to be
nominated by the Company for continued service as a director, but
is not nominated for the Board for election by shareholders, other
than for good reason, as determined by the Board in its discretion,
then the restricted stock units shall vest in full as of the
director’s last date of service as a director of the Company.
On April 24, 2020, upon the resignation of former director Ryan
Turner, the Company accelerated the vesting of Mr. Turner’s
unvested restricted stock units granted September 6, 2019 and
issued 10,389 shares of common stock.
On
September 6, 2018, the Company granted to each non-employee
director restricted stock units with a grant-date fair value of $20
per award (resulting in total aggregate grant-date fair value of
$140), which vest in five equal, annual installments beginning with
the first anniversary of the grant date, subject to the
director’s continued service through such date, provided
that, if the director makes himself available and consents to be
nominated by the Company for continued service as a director, but
is not nominated for the Board for election by shareholders, other
than for good reason, as determined by the Board in its discretion,
then the restricted stock units vest in full as of the
director’s last date of service as a director of the Company.
On September 6, 2019, which was the first anniversary of the grant
date, the first tranche of the September 2018 restricted stock
units vested. On April 24, 2020, upon the resignation of Mr.
Turner, the Company accelerated the vesting of Mr. Turner’s
unvested restricted stock units granted September 6, 2018 and
issued 4,050 shares of common stock.
On June
4, 2018, the Company granted to each non-employee director
restricted stock units with a grant fair value of $20 per award
(resulting in total aggregate grant-date fair value of $140), which
vested on June 4, 2019.
The
Company recorded non-cash restricted stock unit compensation
expense of $68 and $89 for the three and six months ended June 30,
2020, respectively, compared with $32 and $74, respectively, for
the same periods last year.
10.
Commitments
and Contingencies
From
time to time, the Company may be involved in various claims and
legal actions arising in the ordinary course of its business. On a
quarterly basis, the Company assesses its liabilities and
contingencies in connection with outstanding legal proceedings
utilizing the latest information available. Where it is probable
that the Company will incur a loss and the amount of the loss can
be reasonably estimated, it records a liability in its consolidated
financial statements. These legal accruals may be increased or
decreased to reflect any relevant developments on a quarterly
basis. Where a loss is not probable or the amount of the loss is
not estimable, the Company does not accrue legal reserves,
consistent with applicable accounting guidance. There were no
pending material claims or legal matters as of June 30,
2020.
On June 24,
2020, the Company entered into a Financial and Consulting Services
Agreement (the “Agreement”) with Itasca Financial LLC
(“Itasca”), pursuant to which Itasca agreed to advise
the Company on aspects of its strategic direction. In exchange for
Itasca’s services, the Company agreed to pay Itasca a
retainer fee of $50,000, payable in two installments of $25,000,
and a monthly fee of $20,000. The Agreement may not be terminated
for a period of two months from June 24, 2020, after which time it
may be terminated by either party at any time with prior written
notice of at least 30 calendar days. As of the date of this report,
the Company has paid $45,000 to Itasca and the parties have agreed
to suspend the Agreement indefinitely. Upon termination of the
Agreement by either party, the Company has agreed to pay Itasca a
termination fee of $100,000, which can be payable in a combination
of cash and stock at the Company’s discretion, and if any
such fee is paid in stock, then the Company has agreed to grant
Itasca unlimited piggyback registration rights for such stock. The
Agreement also includes expense reimbursement provisions and
indemnification provisions in favor of Itasca and its affiliates.
This description of the Agreement is a summary only and is
qualified by reference to full text of Agreement, which is filed as
an exhibit to this report.
Fundamental Global
Investors, LLC, with its affiliates (collectively,
“Fundamental Global”), is the largest stockholder of
the Company. D. Kyle Cerminara, the Chief Executive Officer,
Co-Founder and Partner of Fundamental Global Investors, LLC, and
Lewis M. Johnson, the President, Co-Founder and Partner of
Fundamental Global Investors, LLC, are both members of the
Company’s Board of Directors, and John W. Struble, Chairman
of the Board of Directors, serves as a consultant to Fundamental
Global Management, LLC, an affiliate of Fundamental Global
Investors, LLC. Fundamental Global is the controlling stockholder
of PIH, and Larry G. Swets, Jr. serves as Interim Chief Executive
Officer and principal executive officer of PIH and as a member of
PIH’s Board of Directors. In addition, Mr. Swets founded and
serves as the managing member of Itasca, which provides services to
the Company, as described above, as well as to other companies
affiliated with Fundamental Global.
Purchase Commitments
As of
June 30, 2020, the Company had purchase commitments for inventory
totaling approximately $6,636.
Significant Customers
Sales
to United States government agencies represented approximately
$4,268 (43.0%) and $10,845 (52.1%) of the Company’s net total
sales for the three and six months ended June 30, 2020,
respectively, compared with approximately $4,021 (30.2%) and $9,421
(45.0%), respectively, for the same periods last year. Accounts
receivable from agencies of the United States government were $589
as of June 30, 2020, compared with approximately $690 at the same
date last year.
On
January 30, 2020, BK Technologies, Inc., a wholly-owned subsidiary
of the Company, entered into a $5,000 Credit Agreement and a
related Line of Credit Note (the “Note” and
collectively with the Credit Agreement, the “Credit
Agreement”) with JPMorgan Chase Bank, N.A.
(“JPMC”). The Credit Agreement provides for a revolving
line of credit of up to $5,000, with availability under the line of
credit subject to a borrowing base calculated as a percentage of
accounts receivable and inventory. The line of credit will expire
on January 31, 2021. 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. The Company and each subsidiary of BK
Technologies, Inc. are guarantors of BK Technologies, Inc.’s
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, commencing on
February 1, 2020, 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 $20,000 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 June 30, 2020 and the date of filing this
report. As of June 30, 2020 and the date of filing this report,
there were no borrowings outstanding under the Credit
Agreement.
On
September 25, 2019, BK Technologies, Inc., a wholly-owned
subsidiary of BK Technologies Corporation, and U.S. Bank Equipment
Finance, a division of U.S. Bank National Association, as a lender,
entered into a Master Loan Agreement in the amount of $425 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 60 equal monthly principal and
interest payments of approximately $8 beginning on October 25,
2019, matures on September 25, 2024 and bears a fixed interest rate
of 5.11%.
The
Company adopted ASU No. 2016-02, “Leases” (Topic 842)
on January 1, 2019 and applied the modified retrospective approach
to adoption whereby the standard is applied only to the current and
future periods. The Company leases manufacturing and office
facilities and equipment under operating leases and determines if
an arrangement is a lease at inception. ROU assets represent the
Company’s right to use an underlying asset for the lease term
and lease liabilities represent its obligation to make lease
payments arising from the lease. Operating lease ROU assets and
liabilities are recognized at the lease commencement date based on
the present value of lease payments over the lease
term.
As
most of its leases do not provide an implicit rate, the Company
uses its incremental borrowing rate based on the information
available at commencement date in determining the present value of
lease payments. The Company’s lease terms may include options
to extend or terminate the lease when it is reasonably certain that
the Company will exercise that option. The Company has lease
agreements with lease and non-lease components, which are accounted
for separately.
The
Company leases approximately 54,000 square feet (not in thousands)
of industrial space in West Melbourne, Florida, under a
non-cancellable operating lease. The lease has the expiration date
of June 30, 2027. Annual rental, maintenance and tax expenses
for the facility are approximately $491.
The
Company also leases 8,100 square feet (not in thousands) of office
space in Lawrence, Kansas, to accommodate a portion of the
Company’s engineering team. In November 2019, this lease was
amended to extend the lease term until December 31, 2021. Annual
rental, maintenance and tax expenses for the facility are
approximately $121.
Lease
costs consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Operating lease
cost
|
$143
|
$134
|
$287
|
$268
|
|
Short-term lease
cost
|
—
|
6
|
2
|
10
|
|
Variable lease
cost
|
32
|
31
|
63
|
63
|
|
Total lease
cost
|
$175
|
$171
|
$352
|
$341
|
Supplemental
cash flow information related to leases was as
follows:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
amounts included in the measurement of lease
liabilities:
|
|
|
|
|
|
Operating
cash flows (fixed payments)
|
$122
|
$118
|
$243
|
$236
|
|
Operating
cash flows (liability reduction)
|
83
|
78
|
164
|
156
|
|
|
|
|
|
|
|
ROU assets obtained
in exchange for lease obligations:
|
|
|
|
|
|
Operating
leases
|
26
|
—
|
35
|
2,840
|
Other
information related to operating leases was as
follows:
|
|
|
|
Weighted average
remaining lease term (in years)
|
6.60
|
|
Weighted average
discount rate
|
5.50%
|
Maturity
of lease liabilities as of June 30, 2020 were as
follows:
|
|
|
|
Remaining
six months of 2020
|
$281
|
|
2021
|
560
|
|
2022
|
447
|
|
2023
|
456
|
|
2024
|
464
|
|
Thereafter
|
1,193
|
|
Total
payments
|
3,401
|
|
|
558
|
|
Total
liability
|
$2,843
|
In
February 2020, the Company entered into a lease for 6,857 square
feet (not in thousands) of office space at Sawgrass Technology
Park, 1619 NW 136th Avenue in Sunrise, Florida, for a period of 64
months commencing July 1, 2020. Annual rental, maintenance and tax
expenses for the facility will be approximately $196 for the first
year, increasing by approximately 3% for each subsequent
twelve-month period. The Company recorded the ROU asset and related
lease liability for this lease upon its commencement.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 2019 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;
●
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;
●
the impact of 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 of 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”) 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, 2019.
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 under two brand names: BK Radio and RELM. Generally, BK
Radio-branded products serve the government and public safety
market, while RELM-branded products serve the business and
industrial 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. The holding company has the same directors and
executive officers as its predecessor, BK Technologies,
Inc.
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 in Wuhan, China, 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 as the first
quarter of 2020 progressed. 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 during the pandemic. Accordingly, we have 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 work places as
necessary and adapted new processes for interactions with our
suppliers and customers to safely manage our operations. One staff
member has tested positive for COVID-19 to date. This employee was
quarantined in accordance with accepted safety practices and is
working remotely. Also, in planning for the possible disruption of
our business, we have taken 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 capital expenditures. We also implemented workforce
reductions during the second quarter of 2020, decreasing employment
and related expenses by approximately 18%. During the first six
months, impact to customer orders was limited as reflected by our
sales, which were comparable to sales for the same period last
year. Also,
while some of our supply chain partners were temporarily
closed during the early stages of the pandemic, most of these
partners resumed operations and we have been able to procure the
materials necessary to manufacture products and fulfill customer
orders. Depending on the progression of the pandemic, our ability
to obtain necessary supplies and ship finished products to
customers may be partly or completely disrupted. Continued
progression of the pandemic 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 year to year. 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, including whether there is a
“second wave,” and the related length of its impact on
the global economy, which are uncertain and, given the daily
evolution of the COVID-19 pandemic and the global responses to curb
its spread, 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, including any recession that
has occurred or may occur in the future. Furthermore, the extent to
which our mitigation efforts are successful, if at all, is not
presently ascertainable. However, we anticipate that 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.
On March 27, 2020, President Trump signed into law
the Coronavirus Aid, Relief and Economic Security Act (the
“CARES Act”). Among other things, the CARES Act
includes provisions relating to refundable payroll tax credits,
deferment of employer side social security payments, net operating
loss carryback periods, alternative minimum tax credit refunds,
modifications to the net interest deduction limitations and
technical corrections to tax depreciation methods for qualified
improvement property. On April 13, 2020, we received an unsecured
Loan (as defined below) in the amount of $2,196,335 under the
Paycheck Protection Program (or “PPP”) established
under the CARES Act, as further discussed below under
“Liquidity and Capital Resources.” We intended
to use the Loan for qualifying expenses in accordance with the
terms of the CARES Act. At the time of application, we believed we
qualified to receive the funds pursuant to the PPP.
On
April 23, 2020, the SBA, in consultation with the Department of
Treasury, issued new guidance that created uncertainty regarding
the qualification requirements for a PPP loan. In April 2020, out
of an abundance of caution, we repaid the loan in
full.
On May
4, 2020, the Company implemented workforce reductions of
approximately 18% to reduce costs and to better position the
Company in an uncertain business environment resulting from the
COVID-19 pandemic. The Company incurred approximately $221,000 in
severance costs relating to these workforce reductions, which were
recognized in the second quarter of 2020 and will be paid according
to our normal payroll practices through September
2020.
Our
stock repurchase program terminated in April 2020 and was not
renewed.
Second Quarter and Six Months Summary
Overall, our
financial and operating results for the three and six months ended
June 30, 2020 were comparable with the same periods of last year
and improved in some respects. For the first half of 2020, sales
were materially unchanged from last year’s six-month period.
While sales for the second quarter of 2020 were below sales for
last year’s second quarter, this was offset by first quarter
2020 sales, which exceeded last year’s first quarter sales.
Gross profit margins as a percentage of sales for the second
quarter and six-month periods of 2020 improved compared with the
same periods of last year and compared with the immediately
preceding quarter. Selling, general and administrative expenses for
the second quarter and six months of 2020 were significantly lower
compared with the same periods last year and compared with the
immediately preceding quarter. Combined, these factors contributed
to an improvement in operating performance, yielding a
significantly reduced operating loss for the six-month period of
2020 compared with the same period last year. Furthermore, during
the first six months of 2020, we reduced inventory by approximately
$4.0 million, which was a primary factor enabling us to generate
positive cash flow from operations.
For the
second quarter of 2020, our sales decreased 25.3% to approximately
$9.9 million, compared with approximately $13.3 million for the
same quarter last year. For the six months ended June 30, 2020,
sales totaled approximately $20.8 million, which were materially
unchanged from the same period last year.
Gross
profit margins as a percentage of sales for the second quarter of
2020 improved to approximately 43.6%, compared with 42.9% for the
second quarter last year. For the six-month period ended June 30,
2020, gross profit margins as a percentage of sales improved to
39.5%, compared with 38.9% for the same period last
year.
Selling, general
and administrative expenses (“SG&A”) for the second
quarter of 2020 decreased 23.2% to approximately $4.4 million,
compared with approximately $5.7 million for the same quarter last
year. SG&A expenses for the first six months of 2020 decreased
12.7% to approximately $9.1 million, compared with approximately
$10.4 million for the same period last year.
For the
second quarter of 2020, we recognized an operating loss of
approximately $36,000, compared with operating income of
approximately $20,000 for the same quarter last year. For the
six-month period of 2020, we reduced our operating loss by
approximately $1.4 million to approximately $884,000, compared with
an operating loss of approximately $2.3 million for the same period
last year.
For the
second quarter of 2020, we recognized an unrealized loss totaling
$200,000 on our investment in 1347 Property Insurance Holdings,
Inc. (“PIH”), made through FGI 1347 Holdings, LP, a
consolidated variable interest entity. This compares with an
unrealized loss of $148,000 on the investment for the second
quarter last year. For the six-month period ended June 30, 2020, we
recognized an unrealized loss of approximately $506,000, compared
with an unrealized gain of $444,000 for last year’s six-month
period.
Net
loss for the three months ended June 30, 2020 was approximately
$302,000 ($0.02 per basic and
diluted share), compared with approximately $247,000 ($0.02 per
basic and diluted share) for the same quarter last year. For the
six months ended June 30, 2020, our net loss totaled approximately
$1.5 million ($0.12 per basic and diluted share), compared with
approximately $1.6 million ($0.12 per basic and diluted share) for
the same period last year.
As of
June 30, 2020, working capital totaled approximately $13.4 million,
of which approximately $10.5 million was comprised of cash, cash
equivalents and trade receivables. As of December 31, 2019, working
capital totaled approximately $14.5 million, of which approximately
$8.6 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 Ended
|
Percentage of
Sales
Six Months Ended
|
|
|
|
|
|
|
|
Sales
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
|
Cost of
products
|
(56.4)
|
(57.1)
|
(60.5)
|
(61.1)
|
|
Gross
margin
|
43.6
|
42.9
|
39.5
|
38.9
|
|
Selling, general
and administrative expenses
|
(43.9)
|
(42.7)
|
(43.7)
|
(49.8)
|
|
Other (expense)
income
|
(2.4)
|
(0.8)
|
(2.9)
|
2.5
|
|
Loss before income
taxes
|
(2.7)
|
(0.9)
|
(7.0)
|
(8.4)
|
|
Income tax
(expense) benefit
|
(0.3)
|
(1.2)
|
(0.1)
|
1.0
|
|
Net
loss
|
(3.0)%
|
(1.8)%
|
(7.2)%
|
(7.5)%
|
Net Sales
For the
second quarter ended June 30, 2020, net sales totaled approximately
$9.9 million, compared with approximately $13.3 million for the
same quarter last year. Sales for the six months ended June 30,
2020 totaled approximately $20.8 million, compared with
approximately $20.9 million for the six-month period last
year.
During
the second quarter of 2019, demand from federal and certain state
customers was stronger following the federal government shutdown
early in 2019. Also, while the precise impact to sales cannot be
quantified, procurement activities of some customers were likely
affected by the COVID-19 pandemic during the second quarter of
2020. Despite such factors, sales for the second quarter of 2020
remained relatively consistent, totaling over 91% of first quarter
2020 sales. Accordingly, for the six-month period of 2020, sales
were approximately the same level compared with the last
year’s six-month period. Customers for the first six months
of 2020 included federal and state agencies as well as
dealers.
Earlier
in 2020, we reorganized our sales resources to more effectively
focus on target markets and customers where we believe we can
maximize our sales success. Our funnel of sales prospects for
coming quarters includes potential new customers
in federal, state and local public safety agencies. We
believe the reorganization and our current sales funnel better
position us to capture new sales opportunities moving
forward.
While
the potential impacts of the COVID-19 outbreak in coming months and
quarters remain uncertain, such effects have the potential to
materially adversely impact our customers, which could reduce
customer orders, and our supply chain, which could impair our
ability to fulfill customer requirements in a timely manner, or at
all. Such negative effects on our customers and suppliers could
materially adversely affect our future business, operations and
financial results.
Design
of the initial product in our new BKR Series product line has been
completed, and we anticipate it will be available for sale in
during the second half of this year and moving forward. Additional
models are planned for introduction in the future. Availability of
the initial BKR Series product for sale and/or development of
additional BKR Series products could be delayed by various factors,
including potential impacts related to the COVID-19 pandemic. BKR
Series products, we believe, should increase our addressable market
by expanding the number of federal and other customers that may
purchase our products. However, the timing and size of orders from
agencies at all levels can be unpredictable and subject to the
influence of 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.
Cost of Products and Gross Profit Margin
Gross
profit margins as a percentage of sales for the second quarter
ended June 30, 2020 improved to approximately 43.6%, compared with
42.9% for the same quarter last year. For the six-month period
ended June 30, 2020, gross profit margins improved to approximately
39.5%, compared with 38.9% 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 second quarter of
2020 increased compared with the same period last year and compared
with the preceding quarter primarily due to a more favorable mix of
product sales and increased manufacturing volumes. During the
second quarter of 2020, we also reduced manufacturing operations
employment by approximately 21%, as well as other related expenses.
These reductions improved our utilization and absorption of
manufacturing and support expenses, contributing favorably to gross
profit margins.
For the
six months ended June 30, 2020, gross profit margins improved
compared with the six-month period last year, although they were
below typical historical levels as the mix of product sales during
the first quarter of 2020 was more heavily weighted toward lower
margin products compared with the first quarter last year.
Additionally, during the first quarter of 2020, more customer
orders were fulfilled with on-hand inventory in concert with our
inventory reduction program, which had a positive impact on
margins. Consequently, gross profit margins were impacted by lower
manufacturing volumes, resulting in suboptimal utilization and
absorption of manufacturing and support expenses. During the first
quarter last year, our sales and manufacturing volumes were
adversely impacted by the federal government shutdown, resulting in
under-absorption of support and overhead expenses.
We
utilize a combination of internal manufacturing capabilities and
contract manufacturing relationships for production efficiencies
and to manage material and labor costs, and anticipate continuing
to do so in the future. 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.
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 second quarter ended June 30, 2020 decreased by $1.3
million, or 23.2%, to approximately $4.4 million (43.9% of sales),
compared with approximately $5.7 million (42.7% of sales) for the
same quarter last year. For the six months ended June 30, 2020,
SG&A expenses decreased by $1.3 million, or 12.7%, to
approximately $9.1 million (43.7% of sales), compared with
approximately $10.4 million (49.8% of sales), for the six-month
period last year. Consistent with employment and expense reductions
in our manufacturing operations, during the second quarter of 2020,
we reduced SG&A employment by approximately 15%, as well as
other expenses in sales, go-to-market, engineering and
headquarters.
Engineering and
product development expenses for the second quarter of 2020
decreased $1.1 million, or 35.2%, to approximately $2.0 million
(20.2% of sales), compared with approximately $3.1 million (23.3%
of sales) for the same quarter of last year. For the six months
ended June 30, 2020, engineering and product development expenses
totaled approximately $4.1 million (19.5% of sales), compared with
approximately $5.2 million (25.1% of sales) for the six-month
period last year. Product development expenses related to an
anticipated new line of portable and mobile radios with enhanced
features, the BKR Series, decreased as development activities
migrated away from external resources to our new internal
engineering team. This team is also involved with our multiband
radio development, which was reevaluated in the fourth quarter of
2019. Design improvements identified by the reevaluation are in
process. The precise date for introducing the multiband product in
the market remains uncertain and could be impacted by the effects
of the COVID-19 pandemic in coming months.
Marketing and
selling expenses for the second quarter of 2020 declined by
approximately $311,000, or 24.4%, to approximately $964,000 (9.7%
of sales), compared with approximately $1.3 million (9.6% of sales)
for the second quarter last year. For the six months ended June 30,
2020, marketing and selling expenses declined approximately
$218,000, or 8.1%, to approximately $2.5 million (11.9% of sales),
compared with approximately $2.7 million (12.9% of sales). The
decreases are attributed to reductions in sales and go-to-market
employment, as well as other sales and marketing related
expenses.
Other
general and administrative expenses for the second quarter 2020
totaled approximately $1.4 million (14.0% of sales), compared with
approximately $1.3 million (9.8% of sales) for the same quarter
last year. For the six months ended June 30, 2020, general and
administrative expenses totaled approximately $2.6 million (12.5%
of sales), compared with approximately $2.5 million (11.9% of
sales) for the six-month period last year. Decreases in employment
and other headquarters expenses were more than offset by severance
costs recognized in the second quarter of 2020 related to our
reduction in employment.
Operating Income (Loss)
The
operating loss for the second quarter ended June 30, 2020 totaled
approximately $36,000, compared with operating income of $20,000
for last year’s second quarter. For the six months ended June
30, 2020, our operating loss improved 61.5% from the same period
last year, totaling approximately $884,000 (4.2% of sales),
compared with approximately $2.3 million (11.0% of sales) for the
six-month period last year. The reduced operating loss for the
first six months of 2020 was primarily attributed to gross profit
margin improvements, while reducing employment and other operating
expenses.
Other (Expense) Income
We
recorded net interest expense of approximately $6,000 for the
second quarter ended June 30, 2020, compared with net interest
income of approximately $46,000 for the second quarter of last
year. For the six months ended June 30, 2020, net interest income
totaled approximately $3,000, compared with approximately $101,000
for the six-month period last year. Reduced interest income was
primarily the result of lower average cash balances.
During
the first six months of 2020, we had no outstanding borrowings
under the Credit Agreement (defined below), and therefore did not
incur any interest expense on any outstanding borrowings under the
Credit Agreement.
Additionally, on
September 25, 2019, through a wholly-owned subsidiary, we entered
into a Master Loan Agreement with U.S. Bank Equipment Finance, a
division of U.S. Bank National Association, in the amount of
$425,000, to finance various items of equipment. The loan is
collateralized by equipment. The agreement has a term of five years
and bears a fixed interest rate of 5.11%.
For the
second quarter ended June 30, 2020, we recognized an unrealized
loss of $200,000 on our investment in PIH, compared with $148,000
for the second quarter last year. For the six months ended June 30,
2020, we recognized an unrealized loss of approximately $506,000 on
our investment in PIH, compared with
an unrealized gain of $444,000 for the same period last
year.
Income Taxes
We
recorded an income tax expense of approximately $28,000 for the
three and six months ended June 30, 2020, compared with an income
tax expense of approximately $154,000 for the second quarter last
year and an income tax benefit of $201,000 for the six-month period
last year. Our income tax expense is derived from the change in
valuation allowance related to net operating loss carryforwards
(“NOLs”) for the state of Florida that are anticipated
to expire unutilized in 2020.
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
June 30, 2020, our net deferred tax assets totaled approximately
$4.3 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 $28,000
related to state of Florida NOLs that are anticipated to expire
unutilized in 2020. 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 June 30, 2020.
Liquidity and Capital Resources
For the
six months ended June 30, 2020, net cash provided by operating
activities totaled approximately $3.6 million, compared with cash
used in operating activities of approximately $1.3 million for the
same period of last year. Cash provided by operating activities for
the six months ended June 30, 2020, was primarily related to a
decrease in inventory, combined with increases in depreciation and
amortization and deferred revenue, as well as an unrealized loss on
our investment in PIH. These items were partially offset by a net
loss and decreases in accounts payable, accrued compensation and
related taxes, and accrued warranty expenses.
For the
six months ended June 30, 2020, we had a net loss of approximately
$1.5 million, compared with approximately $1.6 million for the same
period last year. Net inventories decreased during the six months
ended June 30, 2020 by approximately $3.9 million, compared with an
increase of approximately $1.8 million for the same period last of
year. The decrease for the first six months of 2020 was primarily
attributable to product sales combined with our inventory reduction
program. Depreciation and amortization totaled approximately
$661,000 for the six months ended June 30, 2020, compared with
approximately $575,000 for the same period last year, primarily due
to capital expenditures related to manufacturing and engineering
equipment. Deferred revenue for the six months ended June 30, 2020
increased approximately $557,000, compared with approximately
$417,000 for the same period last year, which was attributed
primarily to the sales of extended warranties. Unrealized losses on
securities for the six months ended June 30, 2020 totaled
approximately $506,000, compared with gains of approximately
$444,000 for last year’s six-month period. For additional
information pertaining to our investment in securities, refer to
Notes 1 (Condensed Consolidated Financial Statements) and 6
(Investment in Securities) to the condensed consolidated financial
statements included in this report. Accounts payable for the six
months ended June 30, 2020, decreased approximately $838,000,
compared with an increase of approximately $1.2 million for the
same period last year, primarily due to payments to suppliers.
Accrued compensation and related taxes for the six months ended
June 30, 2020 decreased approximately $331,000, compared with
$691,000 for the six-month period last year due to reductions in
employment and incentive compensation. Accrued warranty expenses
for the six months ended June 30, 2020 decreased approximately
$337,000, compared with approximately $106,000 for the same period
last year. The decreases are attributed primarily to manufacturing
operations and quality improvements.
Cash
used in investing activities for the six months ended June 30, 2020
totaled approximately $525,000 and was attributed to purchases of
property, plant and equipment. For the same period last year, cash
used in investing activities totaled approximately $1.5 million,
and was also attributed to purchases of property, plant and
equipment.
For the
six months ended June 30, 2020, cash of approximately $809,000 was
used in financing activities. During the period we received
proceeds totaling approximately $2.2 million under the PPP, which
were repaid in full within the same period. We also used cash for
our capital return program, which included quarterly dividends
totaling approximately $502,000 and stock repurchases totaling
approximately $269,000. Our stock repurchase program terminated in
April 2020 and was not renewed. For the six-month period last year,
approximately $510,000 was used to pay dividends and approximately
$550,000 was used for stock repurchases.
On
April 13, 2020, BK Technologies, Inc., our wholly-owned operating
subsidiary, received approval and funding pursuant to a promissory
note (the “PPP Note”) evidencing an unsecured loan in
the amount of $2,196,335 (the “Loan”) under the PPP.
The PPP was established under the CARES Act and is administered by
the U.S. Small Business Administration (“SBA”). The
Loan was made through JPMorgan Chase Bank, N.A.
(“JPMC”). We
intended to use the Loan for qualifying expenses in accordance with
the terms of the CARES Act. At the time of application, we believed
we qualified to receive the funds pursuant to the PPP.
On
April 23, 2020, the SBA, in consultation with the Department of
Treasury, issued new guidance that created uncertainty regarding
the qualification requirements for a PPP loan. In April 2020, out
of an abundance of caution, the Company repaid the loan in
full.
On May
4, 2020, the Company implemented workforce reductions of
approximately 18% to reduce costs and to better position the
Company in an uncertain business environment resulting from the
COVID-19 pandemic. The Company incurred approximately $221,000 in
severance costs relating to these workforce reductions, which were
recognized in the second quarter of 2020 and is being paid under
our customary payroll practices through September
2020.
On
January 30, 2020, BK Technologies, Inc., our wholly-owned
subsidiary, entered into a $5.0 million Credit Agreement and a
related Line of Credit Note (the “Note” and
collectively with the Credit Agreement, the “Credit
Agreement”) with JPMC. The Credit Agreement provides for a
revolving line of credit of up to $5.0 million, with availability
under the line of credit subject to a borrowing base calculated as
a percentage of accounts receivable and inventory. The line of
credit will expire on January 31, 2021. 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. We and each
subsidiary of BK Technologies, Inc. are guarantors of BK
Technologies, Inc.’s 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, commencing on
February 1, 2020, 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 $20.0 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 June 30, 2020 and the date of filing this
report. As of June 30, 2020 and the date of filing this report,
there were no borrowings outstanding under the Credit Agreement and
there was approximately $3.9 million of borrowing available under
the Credit Agreement.
On
September 25, 2019, BK Technologies, Inc., a wholly-owned
subsidiary of BK Technologies Corporation, and U.S. Bank Equipment
Finance, a division of U.S. Bank National Association, as a lender,
entered into a Master Loan Agreement in the amount of $425,000 to
finance items of manufacturing equipment. The loan is
collateralized by the equipment purchased using the proceeds. The
Master Loan Agreement has a term of five years and bears a fixed
interest rate of 5.11%.
Our
cash and cash equivalents balance at June 30, 2020 was
approximately $6.9 million. We believe these funds, combined
with our cost-saving initiatives, 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, 2019 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,
software development 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
quarter ended June 30, 2020, as described in Item 7 of our Annual
Report on Form 10-K for the fiscal year ended December 31,
2019.
Evaluation of Disclosure Controls and Procedures
Our
President (who serves as our principal executive officer) and Chief
Financial Officer (who serves as our principal financial and
accounting officer) have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) as of June 30, 2020. Based on this evaluation, they have
concluded that our disclosure controls and procedures were
effective as of June 30, 2020.
Changes in Internal Control over Financial Reporting
During
the three months ended June 30, 2020, there were no changes in our
internal control over financial reporting identified in connection
with the evaluation required by Exchange Act Rule 13a-15(d) that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1A
“Risk Factors” in our Annual Report on Form 10-K for
the year ended December 31, 2019 includes a detailed discussion of
the Company’s risk factors. There have been no material
changes to the risk factors as disclosed in our Annual Report,
except as set forth below. However, many of the risk factors
disclosed in Item 1A of our Annual Report have been, and we expect
will continue to be further, heightened or exacerbated by the
impact of the COVID-19 pandemic.
The COVID-19 pandemic and ensuing governmental responses have
negatively impacted, and could further materially adversely affect,
our business, financial
condition, results of operations and cash flow.
In December 2019, a novel strain of the
coronavirus (COVID-19) surfaced in Wuhan, China, which spread
globally and was declared a pandemic by the World Health
Organization in March 2020. We expect the COVID-19 pandemic
to have a material adverse impact on our business and financial
performance. The extent of the impact of the COVID-19 pandemic on
our business and financial performance, including our ability to
execute our near-term and long-term business strategies and
initiatives, such as the launch of products in the BKR Series, in
the expected time frame, will depend on future developments,
including the duration and severity of the pandemic, including
whether there is a “second wave,” which are uncertain
and, given the daily evolution of the
COVID-19 pandemic and the global responses to curb its
spread, cannot be predicted. In addition, the pandemic has
significantly increased economic and demand uncertainty and caused
a worldwide economic downturn and recession. 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, including any recession that
has occurred or may occur in the future.
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. Although many
governmental measures have had specific expiration dates, some of
those measures have already been extended more than once or
re-implemented as cases of COVID-19 increased in certain areas; as
a result, there is considerable uncertainty regarding the duration
of such measures and potential future measures. Measures providing
for business shutdowns generally exclude certain essential
services, and those essential services commonly include critical
infrastructure and the businesses that support that critical
infrastructure, which includes our business. While our
manufacturing operations have remained open, these measures have
impacted and may further impact our workforce and operations, as
well as those of our customers, vendors and suppliers.
We have
modified our business practices and implemented certain policies at our offices in
accordance with best practices to accommodate, and at times
mandate, social distancing and remote work practices,
including restricting employee travel, modifying employee work
locations, implementing social distancing and enhanced sanitary
measures in our facilities, and cancelling attendance at events and
conferences. In addition, we have
invested in employee safety equipment, additional cleaning supplies
and measures, re-designed production lines and work places as
necessary and adapted new processes for interactions with our
suppliers and customers to safely manage our operations.
Many of our suppliers, vendors and service providers have made
similar modifications. Part of our workforce is currently working
from home, and the resources available to employees working
remotely may not enable them to maintain the same level of
productivity and efficiency as working from the Company’s
offices. Additionally, these and other employees may face
additional demands on their time, such as increased
responsibilities resulting from school closures or the illness of
family members. Further, our increased reliance on remote access to
our information systems increases our exposure to potential
cybersecurity breaches. We may take further actions as government
authorities require or recommend or as we determine to be in the
best interests of our employees, customers, partners and suppliers.
In light of the economic downturn generated by the COVID-19
pandemic, we have taken steps to reduce expenses throughout the
Company, including 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 capital expenditures, and
restructured our operations, including, among other things,
reducing our workforce by approximately 18% during the second
quarter of 2020. We incurred costs as a result of the workforce
reduction, including approximately $221,000 in severance costs,
which were recognized in the second quarter of 2020, and there can
be no assurance that we will be able to rehire our workforce in the
event our business experiences a subsequent recovery. There is no
certainty that such measures will be sufficient to mitigate the
risks posed by COVID-19, in which case our employees may become
sick, our ability to perform critical functions could be harmed,
and our business and operations could be negatively impacted. We
have had one employee test positive for COVID-19 to date. The
employee was quarantined in accordance with accepted safety
practices and is working remotely. The resumption of normal
business operations after such interruptions may be delayed or
constrained by lingering effects of COVID-19 on our suppliers,
third-party service providers, and/or customers.
In
addition, we have experienced delays and cost increases, and may
continue to do so, in obtaining and transporting supplies.
Since the outbreak, some of our supply
chain partners were temporarily closed for a period of
time. Most
of these facilities have been reopened. Although we have in
some cases experienced delays and increased freight costs, we have,
to date, been able to procure the materials necessary to
manufacture products and fulfill customer orders, which may not
continue to be the case in the event the pandemic worsens or
continues for an extended period of time. Depending on the continued progression of the
pandemic, our ability to obtain necessary supplies, manufacture our
products and ship finished products to customers may be
disrupted.
Further, our
current and potential customers’ businesses could be
disrupted or they could seek to limit spending, including shifting
purchases to lower-priced or other perceived value offerings or
reducing their purchases and inventories due to decreased budgets,
reduced access to credit or various other factors, any of which
could negatively impact the willingness or ability of such
customers to place new, or any, orders with us and ultimately
adversely affect our revenues, as well as negatively impact the
payment of accounts receivable and collections and potentially lead
to write-downs or write-offs.
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 of the pandemic and the related length of
its impact on the global economy, which remain uncertain and cannot
be predicted at this time. Furthermore, the extent to which
our mitigation efforts are successful, if at all, is not presently
ascertainable. However, we expect that our results of operations,
including revenues, in future periods will continue to be adversely
impacted by the COVID-19 pandemic and its negative effects on
global economic conditions, which impact may continue even after
the COVID-19 pandemic has subsided.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
|
|
Total Number of Shares Purchased
|
Average Price Paid Per Share (1)
|
Total Number of Shares Purchased as Part of Publicly Announced
Plans or Programs (2)
|
Maximum Number of Shares that May Yet Be Purchased Under Publicly
Announced Plans or Programs (2)
|
|
04/01/20-04/30/20
|
16,129
|
$1.63
|
16,129
|
0
|
|
05/01/20-05/31/20
|
0
|
$0
|
0
|
0
|
|
06/01/20-06/30/20
|
0
|
$0
|
0
|
0
|
|
Total
|
16,129
|
$1.63
|
16,129
|
|
(1)
Average price paid
per share of common stock repurchased is the executed price,
including commissions paid to brokers.
(2)
The Company had a
repurchase program of up to 1 million shares of the Company’s
common stock that could be purchased, from time to time, pursuant
to a stock repurchase plan in conformity with the provisions of
Rule 10b5-1 and Rule 10b-18 promulgated under the Exchange Act. The
repurchase program was initially announced in May 2016 and expanded
in June 2017. The program terminated in April 2020 and was not
renewed.
Dividend
Restrictions
On
January 30, 2020, BK Technologies, Inc., our wholly-owned operating
subsidiary, entered into the Credit Agreement with JPMC. The Credit
Agreement contains limitations and covenants that may limit BK
Technologies, Inc.’s ability to take certain actions,
including pay dividends to the Company.
On June
24, 2020, the Company entered into a Financial and Consulting
Services Agreement (the “Agreement”) with Itasca
Financial LLC (“Itasca”), pursuant to which Itasca
agreed to advise the Company on aspects of its strategic direction.
In exchange for Itasca’s services, the Company agreed to pay
Itasca a retainer fee of $50,000, payable in two installments of
$25,000, and a monthly fee of $20,000. The Agreement may not be
terminated for a period of two months from June 24, 2020, after
which time it may be terminated by either party at any time with
prior written notice of at least 30 calendar days. As of the date
of this report, the Company has paid $45,000 to Itasca and the
parties have agreed to suspend the Agreement indefinitely. Upon
termination of the Agreement by either party, the Company has
agreed to pay Itasca a termination fee of $100,000, which can be
payable in a combination of cash and stock at the Company’s
discretion, and if any such fee is paid in stock, then the Company
has agreed to grant Itasca unlimited piggyback registration rights
for such stock. The Agreement also includes expense reimbursement
provisions and indemnification provisions in favor of Itasca and
its affiliates. This description of the Agreement is a summary only
and is qualified by reference to full text of Agreement, which is
filed as an exhibit to this report.
Fundamental Global
Investors, LLC, with its affiliates (collectively,
“Fundamental Global”), is the largest stockholder of
the Company. D. Kyle Cerminara, the Chief Executive Officer,
Co-Founder and Partner of Fundamental Global Investors, LLC, and
Lewis M. Johnson, the President, Co-Founder and Partner of
Fundamental Global Investors, LLC, are both members of the
Company’s Board of Directors, and John W. Struble, Chairman
of the Board of Directors, serves as a consultant to Fundamental
Global Management, LLC, an affiliate of Fundamental Global
Investors, LLC. Fundamental Global is the controlling stockholder
of PIH, and Larry G. Swets, Jr. serves as Interim Chief Executive
Officer and principal executive officer of PIH and as a member of
PIH’s Board of Directors. In addition, Mr. Swets founded and
serves as the managing member of Itasca, which provides services to
the Company, as described above, as well as to other companies
affiliated with Fundamental Global.
Exhibits required
to be filed by Item 601 of Regulation S-K are listed in the Exhibit
Index below.
Exhibit Index
|
Exhibit
Number
|
|
Description
|
|
|
|
Articles
of Merger, filed with the Nevada Secretary of State on March 28,
2019 (Incorporated by reference from Exhibit 3.1 to the
Company’s Current Report on Form 8-K12B filed March 28,
2019)
|
|
|
|
Articles
of Incorporation of BK Technologies Corporation (Incorporated by
reference from Exhibit 3.2 to the Company’s Current Report on
Form 8-K12B filed March 28, 2019)
|
|
|
|
Bylaws
of BK Technologies Corporation (Incorporated by reference from
Exhibit 3.3 to the Company’s Current Report on Form 8-K12B
filed March 28, 2019)
|
|
|
|
Financial
and Consulting Services Agreement, dated June 24, 2020, by and
between BK Technologies Corporation and Itasca Financial
LLC
|
|
|
|
Form of Directors’ and Executive Officers’
Indemnification Agreement (Incorporated by reference from Exhibit
10.1 to the Company’s Current Report on Form 8-K filed July
23, 2020)
|
|
|
|
Certification
of Principal Executive Officer Pursuant to Item 601(b)(31) of
Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
Certification
of Principal Financial Officer Pursuant to Item 601(b)(31) of
Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
Certification
of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished pursuant to Item 601(b)(32) of Regulation
S-K)
|
|
|
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished pursuant to Item 601(b)(32) of Regulation
S-K)
|
|
Exhibit
101.INS
|
|
XBRL
Instance Document
|
|
Exhibit
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
Exhibit
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
Exhibit
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
Exhibit
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
Exhibit
101.DEF
|
|
XBRL
Taxonomy Definition Linkbase Document
|
*
Management contract or compensatory
plan or arrangement.
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
BK TECHNOLOGIES CORPORATION
|
|
|
(The “Registrant”)
|
|
|
|
|
Date:
August 5, 2020
|
By:/s/
Timothy A.
Vitou
|
|
|
Timothy
A. Vitou
President
(Principal
executive officer and duly
authorized
officer)
|
|
|
|
|
Date:
August 5, 2020
|
By:/s/
William P.
Kelly
|
|
|
William
P. Kelly
Executive Vice
President and
Chief
Financial Officer
(Principal
financial and accounting
officer
and duly authorized officer)
|
|
|
|
