BK TECHNOLOGIES CORPORATION
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
· changes or advances in technology;
· the success of our land mobile radio product line;
· successful introduction of new products and technologies, including our
ability to successfully develop and sell our anticipated new multiband
product and other related products in the planned new BKR Series product
line;
· competition in the land mobile radio industry;
· general economic and business conditions, including federal, state and
local government budget deficits and spending limitations, any impact from
a prolonged shutdown of the U.S. Government , and the ongoing effects of
the COVID-19 pandemic;
· the availability, terms and deployment of capital;
· reliance on contract manufacturers and suppliers;
· risks associated with fixed-price contracts;
· heavy reliance on sales to agencies of the U.S. Government and our ability
to comply with the requirements of contracts, laws and regulations related
to such sales;
· allocations by government agencies among multiple approved suppliers under
existing agreements;
· our ability to comply with U.S. tax laws and utilize deferred tax assets;
· our ability to attract and retain executive officers, skilled workers and
key personnel;
· our ability to manage our growth;
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· our ability to identify potential candidates and to consummate
acquisition, disposition or investment transactions, and risks incumbent
with being a noncontrolling interest stockholder in a corporation;
· the impact of general business conditions, including those resulting from
the COVID-19 pandemic, on the companies in which we hold investments;
· impact of our capital allocation strategy;
· risks related to maintaining our brand and reputation;
· impact of government regulation;
· rising health care costs;
· our business with manufacturers located in other countries, including
changes in the U.S. Government and foreign governments' trade and tariff
policies, as well as any further impact resulting from the COVID-19
pandemic;
· our inventory and debt levels;
· protection of our intellectual property rights;
· fluctuation in our operating results and stock price;
· acts of war or terrorism, natural disasters and other catastrophic events,
such as the COVID-19 pandemic;
· any infringement claims;
· data security breaches, cyber-attacks and other factors impacting our
technology systems;
· availability of adequate insurance coverage;
· maintenance of our NYSE American listing;
· risks related to being a holding company; and
· the effect on our stock price and ability to raise equity capital through
future sales of shares of our common stock.
Some of these factors and risks have been, and may further be, exacerbated by the COVID-19 pandemic. We assume no obligation to publicly update or revise any forward-looking statements made in this report, whether as a result of new information, future events, changes in assumptions or otherwise, after the date of this report. Readers are cautioned not to place undue reliance on these forward-looking statements.
Reported dollar amounts in the management's discussion and analysis ("MD&A") section of this report are disclosed in millions or as whole dollar amounts.
The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and notes thereto appearing
elsewhere in this report and the MD&A, consolidated financial statements and
notes thereto appearing in our Annual Report on Form 10-K for the fiscal year
ended
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Executive Overview
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
Holding Company Reorganization
On
As part of the holding company reorganization, stockholders of our predecessor,
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
(
Impact of COVID-19 Pandemic
In
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In planning for the possible disruption of our business, we took steps to reduce expenses throughout the Company. This included suspending all Company travel for a period of time, as well as our participation in trade shows and other business meetings, instituting strict inventory control and decreasing expenditures. We also implemented workforce reductions during 2020. For the first nine months of 2021, the impact to our business, particularly customer orders, is not known with certainty. Recently, worldwide shortages of materials, particularly semiconductors and integrated circuits, have resulted in limited supplies, extended lead times and increased costs and inventory levels for certain components used in our products. While, generally, we have been able to procure the material necessary to manufacture our products and fulfill customer orders, there have been delays and longer delivery times within our supply chain. While we cannot be certain of the progression or duration of these shortages, they may last for several quarters or years. The impact on our operations of such shortages, or additional shortages that may surface, is uncertain, but could potentially impact our future sales, inventory levels, manufacturing operations and financial results. Continued progression of these circumstances could result in a decline in customer orders, as our customers could shift purchases to lower-priced or other perceived value offerings or reduce their purchases and inventories due to decreased budgets, reduced access to credit or various other factors, and impair our ability to manufacture our products, which could have a material adverse impact on our results of operations and cash flow. While the current impacts of COVID-19 are reflected in our results of operations, we cannot at this time separate the direct COVID-19 impacts from other factors that cause our performance to vary from quarter to quarter. The ultimate duration and impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration and severity of the pandemic, and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of its national and, to some extent, global economic impact. Furthermore, the extent to which our mitigation efforts are successful, if at all, is not presently ascertainable. However, our results of operations in future periods may continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions.
We may experience fluctuations in our quarterly results, in part, due to governmental customer spending patterns that are influenced by government fiscal year-end budgets and appropriations. We may also experience fluctuations in our quarterly results, in part, due to our sales to federal and state agencies that participate in wildland fire-suppression efforts, which may be greater during the summer season when forest fire activity is heightened. In some years, these factors may cause an increase in sales for the second and third quarters, compared with the first and fourth quarters of the same fiscal year. Such increases in sales may cause quarterly variances in our cash flow from operations and overall financial condition.
Third Quarter and Nine months Summary
Customer demand and orders for our products were strong during the three months
ended
For the third quarter 2021, sales were materially flat compared with the third
quarter last year and increased 11.4% from the immediately preceding quarter.
The improvement in sales for the third quarter brought sales for the nine-months
ended
For the third quarter of 2021, our sales totaled approximately
Gross profit margins as a percentage of sales for the third quarter of 2021 were
approximately 32.8%, compared with 41.6% (as adjusted) for the third quarter
last year. For the nine-month period ended
SG&A expenses for the third quarter of 2021 totaled approximately
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For the third quarter of 2021, we recognized an operating loss of approximately
For the third quarter of 2021, we recognized an unrealized loss totaling
approximately
Net loss for the three months ended
As of
Results of Operations
As an aid to understanding our operating results for the periods covered by this report, the following table shows selected items from our condensed consolidated statements of operations expressed as a percentage of sales:
Percentage of Sales Percentage of Sales
Three Months Ended Nine months Ended
September 30, September 30, September 30, September 30,
2021 2020* 2021 2020 *
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of
products (67.2 ) (58.4 ) (64.3 ) (60.5 )
Gross margin 32.8 41.6 35.7 39.5
Selling,
general and
administrative
expenses (35.7 ) (32.6 ) (40.1 ) (39.5 )
Other
(expense)
income (17.4 ) (2.8 ) 0.7 (2.8 )
(Loss) income
before income
taxes (20.3 ) 6.2 (3.7 ) (2.8 )
Income tax
(expense)
benefit (0.0 ) (0.0 ) (0.6 ) (0.1 )
Net (loss)
income (20.3 )% 6.2 % (4.3 )% (2.9 )%
* The amounts for 2020 and the amounts prior to
Net Sales
For the third quarter ended
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Customer demand and orders for our products were particularly strong during the third quarter. Supply chain constraints limited our ability to manufacture the quantities needed to convert the orders into shipments and sales revenue. Accordingly, as of the end of the third quarter, these orders were carried in backlog, and we anticipate fulfilling many of them during the fourth quarter of 2021. Although supply chain factors may continue to create delays during the next several quarters, we anticipate being able to fulfill customer requirements. The precise impact to sales and shipments for future quarters, however, cannot be quantified.
Sales for the three and nine months ended
The BKR Series is envisioned as a comprehensive line of new products, which will include new models in coming quarters. The timing of developing additional BKR Series products and bringing them to market could be impacted by various factors, including potential impacts related to our supply chain and the COVID-19 pandemic. BKR Series products, we believe, should increase our addressable market by expanding the number of federal and other public safety customers that may purchase our products. However, the timing and size of orders from agencies at all levels can be unpredictable and subject to budgets, priorities, and other factors. Accordingly, we cannot assure that sales will occur under particular contracts, or that our sales prospects will otherwise be realized.
Last year we reorganized our sales resources to focus more effectively on target markets and customers where we can realize sales success. The current funnel of sales prospects includes potential new customers in federal, state, and local public safety agencies. We believe the reorganization and our sales funnel better position us to capture new sales opportunities moving forward.
While the potential impacts of material shortages, lead-times and the COVID-19 pandemic in coming months and quarters remain uncertain, such effects have the potential to adversely impact our customers and our supply chain. Such negative effects on our customers and suppliers could adversely affect our future sales, operations, and financial results.
Cost of Products and Gross Profit Margin
Gross profit margins as a percentage of sales for the third quarter ended
Our cost of products and gross profit margins are primarily derived from
material, labor and overhead costs, product mix, manufacturing volumes and
pricing. Gross profit margins for the third quarter and nine months ended
We utilize a combination of internal manufacturing capabilities and contract
manufacturing relationships for production efficiencies and to manage material
and labor costs. While we anticipate continuing to do so in the future, we have
increased, and are continuing to increase, our utilization of
During recent quarters, worldwide shortages of materials, including semiconductors and integrated circuits, have resulted in limited supplies and extended lead times for certain components used in our products. While, generally, we have been able to procure the material necessary to manufacture our products and fulfill customer orders, there have been delays, extended lead times and increased costs within our supply chain. While the progression and duration of these shortages is not known with certainty, they may last for several quarters or years. The impact on our operations of such shortages, or additional shortages that may surface, is uncertain, but could potentially impact our future sales, manufacturing operations and financial results.
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Selling, General and Administrative Expenses
SG&A expenses consist of marketing, sales, commissions, engineering, product development, management information systems, accounting, headquarters, and non-cash share-based employee compensation expenses.
SG&A expenses for the third quarter ended
Engineering and product development expenses for the third quarter of 2021
totaled approximately
Marketing and selling expenses for the third quarter of 2021 totaled
approximately
Other general and administrative expenses for the third quarter 2021 totaled
approximately
Operating Loss
The operating loss for the third quarter ended
Other (Expense) Income
We recorded net interest expense of approximately
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For the third quarter ended
Income Taxes
We recorded an income tax expense of
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
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
Liquidity and Capital Resources
For the nine months ended
For the first nine months of 2021, we had a net loss of approximately
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Cash used in investing activities for the nine months ended
For the nine months ended
On
Borrowings under the Credit Agreement will bear interest at a rate per annum equal to one-month LIBOR (or zero if the LIBOR is less than zero) plus a margin of 1.90%. The line of credit is to be repaid in monthly payments of interest only, payable in arrears, with all outstanding principal and interest to be payable in full at maturity.
The Credit Agreement contains certain customary restrictive covenants, including
restrictions on liens, indebtedness, loans and guarantees, acquisitions and
mergers, sales of assets, and stock repurchases by
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
On
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Our cash and cash equivalents balance at
Critical Accounting Policies
In response to the
Except as discussed below under "Change in Accounting Principle", there were no
changes to our critical accounting policies during the quarter ended
Change in Accounting Principle
As disclosed in Note 1 and 4, on
The accounting change did not have a material effect on the loss from
operations, net loss, or earnings per share for the three and nine months ended
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