What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-12 compared with 2021-11-12 · 99 added, 126 removed, 153 unchanged (60% of the section changed)

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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;

Government, and the ongoing effects of the COVID-19 pandemic, inflation, supply-chain constraints, ongoing geopolitical conflicts and related sanctions;

the availability, terms and deployment of capital;

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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;

the impact of general business conditions, including those resulting from the COVID-19 pandemic, ongoing geopolitical conflicts and related sanctions, on the companies in which we hold investments;

impact of our capital allocation strategy;

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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;

Government and foreign governments’ trade and tariff policies, as well as any further impact resulting from the COVID-19 pandemic, ongoing geopolitical conflicts and related sanctions;

our inventory and debt levels;

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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;

acts of war or terrorism, natural disasters and other catastrophic events;

any infringement claims;

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Reported dollar amounts in the management’s discussion and analysis (“MD&A”) section of this report are disclosed in millions or as whole dollar amounts.

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report and the MD&A, consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 3, 2021.

Executive Overview

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Generally, BK-branded products serve the government and public safety market.

We also recently launched our business unit dedicated to the development of software-as-a-service (SaaS) solutions.

Holding Company Reorganization

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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

Impact of COVID-19 Pandemic and Recent Capital Markets Disruption

In December 2019, a novel strain of the coronavirus (COVID-19) surfaced, which spread globally and was declared a pandemic by the World Health Organization in March 2020.

The challenges posed by the COVID-19 pandemic on the global economy increased significantly in the first several months of 2020.

In response to COVID-19, national and local governments around the world instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders, and recommendations to practice social distancing.

We are considered an “essential business” that is supporting first responders and our manufacturing operations have remained open throughout the pandemic.

We implemented certain policies at our offices in accordance with best practices to accommodate, and at times mandate, social distancing, wearing face masks, and remote work practices.

In response to the COVID-19 pandemic, we implemented certain policies at our offices in accordance with best practices to accommodate, and at times mandate, social distancing, wearing face masks, and remote work practices.

Among other things, we have invested in employee safety equipment, additional cleaning supplies and measures, adjusted production lines and workplaces as necessary and adapted new processes for interactions with our suppliers and customers to safely manage our operations.

Any employees that test positive for COVID-19 are quarantined and, if possible, work remotely in accordance with accepted safety practices until after passing subsequent testing.

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.

Additionally, U.S.

and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine.

On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported.

Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions.

We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.

Furthermore, Russia’s prior annexation of Crimea, recent recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military interventions in Ukraine have led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic, including agreement to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) payment system.

Additional potential sanctions and penalties have also been proposed and/or threatened.

Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds.

The impact to our business in 2022, particularly customer orders, is not known with any certainty.

Recently, worldwide shortages of materials, particularly semiconductors and integrated circuits, have resulted in limited supplies, extended lead times, and increased our costs and inventory levels for certain components used in our products.

While, generally, we have been able to procure the material necessary to manufacture our products and fulfill customer orders, there have been delays and long delivery times within our supply chain.

While the progression and duration of these shortages is not known with certainty, they may last for several quarters or years.

The impact on our operations of such shortages, or additional shortages that may surface, is uncertain, but could potentially impact our future sales, manufacturing operations and financial results.

Continued progression of these circumstances could result in a decline in customer orders, as our customers could shift purchases to lower-priced or other perceived value offerings or reduce their purchases and inventories due to decreased budgets, reduced access to credit or various other factors, and impair our ability to manufacture our products, which could have a material adverse impact on our results of operations and cash flow.

While the current impacts of COVID-19 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.

While the current impacts of COVID-19 and ongoing geopolitical conflicts and related sanctions are reflected in our results of operations, we cannot at this time separate the direct impacts of these matters from other factors that cause our performance to vary from quarter to quarter.

The ultimate duration and impact of the COVID-19 pandemic, the ongoing geopolitical conflicts and related sanctions on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration and severity of the pandemic, the duration of the ongoing conflict in Ukraine and additional sanctions related thereto, and the related length of the impact on the global economy, which are uncertain and cannot be predicted at this time.

Even after the COVID-19 pandemic has subsided and geopolitical tensions subside, we may continue to experience an adverse impact to our business as a result of the national and, to some extent, global economic impact.

Furthermore, the extent to which our mitigation efforts are successful, if at all, is not presently ascertainable.

However, our results of operations in future periods may continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions.

However, our results of operations in future periods may continue to be adversely impacted by the COVID-19 pandemic, the ongoing geopolitical conflict and related sanctions, and their negative effects on global economic conditions.

We may experience fluctuations in our quarterly results, in part, due to governmental customer spending patterns that are influenced by government fiscal year-end budgets and appropriations.

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Such increases in sales may cause quarterly variances in our cash flow from operations and overall financial condition.

Third Quarter and Nine months Summary

Customer demand and orders for our products were strong during the three months ended September 30, 2021.

First Quarter Summary

Customer demand and orders for our products continued to be strong during the three months ended March 31, 2022.

Supply chain constraints limited our ability to manufacture the quantities needed to ship and fulfill all the orders.

Consequently, these orders were carried in backlog, and we anticipate fulfilling many of these orders during the fourth quarter of 2021.

For the third quarter 2021, sales were materially flat compared with the third quarter last year and increased 11.4% from the immediately preceding quarter.

The improvement in sales for the third quarter brought sales for the nine-months ended September 30, 2021, within 3.2% of last year’s nine-month period.

Gross profit margins as a percentage of sales for the third quarter and nine-month periods of 2021 decreased compared with the same periods of last year, generally reflecting cost increases in materials and freight, and a less favorable sales mix.

Selling, general and administrative (“SG&A”) expenses for the nine-month period ended September 30, 2021, decreased 1.7% from the same period last year.

For the third quarter of 2021, our sales totaled approximately $12.6 million, compared with approximately $12.8 million for the same quarter last year.

For the nine months ended September 30, 2021, sales totaled approximately $32.5 million, compared with approximately $33.6 million for the same period last year.

Gross profit margins as a percentage of sales for the third quarter of 2021 were approximately 32.8%, compared with 41.6% (as adjusted) for the third quarter last year.

For the nine-month period ended September 30, 2021, gross profit margins as a percentage of sales were approximately 35.7%, compared with 39.5% (as adjusted) for the same period last year.

SG&A expenses for the third quarter of 2021 totaled approximately $4.5 million, compared with approximately $4.2 million for the same quarter last year.

SG&A expenses for the first nine months of 2021 totaled approximately $13.0 million, compared with approximately $13.3 million for the same period last year.

For the third quarter of 2021, we recognized an operating loss of approximately $370,000, compared with operating income of approximately $1.2 million (as adjusted) for the same quarter last year.

For the nine-month period ended September 30, 2021, our operating loss totaled approximately $1.4 million (as adjusted), compared with operating income of approximately $5,000 (as adjusted) for the same period last year.

For the third quarter of 2021, we recognized an unrealized loss totaling approximately $2.2 million on our investment in FGF Financial (formerly 1347 Property Insurance Holdings, Inc.), made through FGI 1347 Holdings, LP, a consolidated variable interest entity.

This compares with an unrealized loss of approximately $291,000 on the investment for the third quarter last year.

For the nine-month period ended September 30, 2021, we recognized an unrealized gain of approximately $310,000, compared with an unrealized loss of $797,000 for the same period last year.

Net loss for the three months ended September 30, 2021, was approximately $2.6 million ($0.15 per basic and diluted share), compared with net income of approximately $790,000 ($0.06 per basic and diluted share), (as adjusted), for the same quarter last year.

For the nine months ended September 30, 2021, our net loss totaled approximately $1.4 million ($0.10 per basic and diluted share), compared with a net loss of approximately $970,000 ($0.08 per basic and diluted share), (as adjusted), for the same period last year.

As of September 30, 2021, working capital totaled approximately $25.6 million, of which approximately $21.7 million was comprised of cash, cash equivalents and trade receivables, reflecting the cash received from or closed public offering of our common stock.

Consequently, these orders were carried in backlog, and we anticipate fulfilling many of these orders during subsequent quarters this year.

For the first quarter 2022, sales decreased approximately $2.0 million (23.1%), compared with the first quarter last year.

While customer orders were strong during the quarter, factors within our supply chain and manufacturing operations, including component availability and extended lead-times, limited our ability to convert orders into shipments and revenue recognition.

Additionally, gross profit margins as a percentage of sales for the first quarter of 2022 decreased compared with the same periods of last year, generally reflecting cost increases in materials and freight, and lower manufacturing volumes.

Selling, general and administrative (“SG&A”) expenses for the three-month period ended March 31, 2022, increased approximately $0.9 million (23.7%) compared with the same quarter last year.

For the first quarter of 2022, our sales totaled approximately $6.6 million, compared with approximately $8.6 million for the same quarter last year.

Gross profit margins as a percentage of sales for the first quarter of 2022 were approximately 22.4%, compared with 36.4% (as adjusted) for the first quarter last year.

SG&A expenses for the first quarter of 2022 totaled approximately $4.9 million, compared with approximately $4.0 million for the same quarter last year.

For the first quarter of 2022, we recognized an operating loss of approximately $3.4 million, compared with approximately $853,000 (as adjusted) for the same quarter last year.

For the first quarter of 2022, we recognized an unrealized loss totaling approximately $0.5 million on our investment in FGF Financial (formerly 1347 Property Insurance Holdings, Inc.), made through FGI 1347 Holdings, LP, a consolidated variable interest entity.

This compares with an unrealized gain of approximately $205,000 on the investment for the first quarter last year.

Net loss for the three months ended March 31, 2022, was approximately $3.9 million ($0.23 per basic and diluted share), compared with approximately $670,000 ($0.05 per basic and diluted share) (as adjusted), for the same quarter last year.

As of March 31, 2022, working capital totaled approximately $21.7 million, of which approximately $11.1 million was comprised of cash, cash equivalents and trade receivables.

As of December 31, 2021, working capital totaled approximately $25.2 million (as adjusted), of which approximately $18.8 million was comprised of cash, cash equivalents and trade receivables.

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Three Months Ended

Percentage of Sales

Nine months Ended

September 30,

September 30, 2020*

September 30,

Cost of products

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Net (loss) income

* The amounts for 2020 and the amounts prior to July 1, 2021, have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 4 to Condensed Consolidated Financial Statements.

For the third quarter ended September 30, 2021, net sales totaled approximately $12.6 million, compared with approximately $12.8 million for the same quarter last year.

Sales for the nine months ended September 30, 2021, totaled approximately $32.5 million, compared with approximately $33.6 million for the nine-month period last year.

Customer demand and orders for our products were particularly strong during the third quarter.

* The amounts for 2021 have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 4 to Condensed Financial Statements.

For the first quarter ended March 31, 2022, net sales totaled approximately $6.6 million, compared with approximately $8.6 million for the same quarter last year.

Customer demand and orders for our products continued to be strong, driving record bookings for the first quarter of 2022.

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.

Consequently, unshipped orders were carried in backlog, and we anticipate fulfilling many of the orders in backlog during subsequent quarters this year.

We are taking steps to manage delays in the supply chain, including carrying additional inventory of material and components with limited supplies.

Although supply chain factors may continue to impact shipments during the next several quarters, we anticipate being able to fulfill customer requirements.

The precise impact to sales and shipments for future quarters, however, cannot be quantified.

Sales for the three and nine months ended September 30, 2021, was attributed primarily to certain federal and state wildland fire and public safety agencies, as well as demand from dealers.

During the third quarter we realized increasing sales of the BKR 5000, the first model in our new BKR Series of APCO Project 25 land mobile radio products and solutions that was launched in the second half of 2020.

Sales for the three months ended March 31, 2022, was attributed primarily to certain state and local public safety opportunities, as well as federal wildland fire related agencies.

From a product perspective, the primary contributor to orders and shipments during the first quarter was our BKR 5000 portable radio and related accessories.

The BKR Series is envisioned as a comprehensive line of new products, which will include new models in coming quarters.

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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.

While the potential impacts of material shortages, lead-times, the COVID-19 pandemic, and ongoing geopolitical conflict and related sanctions in coming months and quarters remain uncertain, such effects have the potential to adversely impact our customers and our supply chain.

Such negative effects on our customers and suppliers could adversely affect our future sales, operations, and financial results.

Cost of Products and Gross Profit Margin

Gross profit margins as a percentage of sales for the third quarter ended September 30, 2021, were approximately 32.8%, compared with 41.6% (as adjusted) for the same quarter last year.

For the nine-month period ended September 30, 2021, gross profit margins were approximately 35.7%, compared with 39.5% (as adjusted) for the same period last year.

Gross profit margins as a percentage of sales for the first quarter ended March 31, 2022, were approximately 22.4%, compared with 36.4% (as adjusted) for the same quarter last year.

Our cost of products and gross profit margins are primarily derived from material, labor and overhead costs, product mix, manufacturing volumes and pricing.

Gross profit margins for the third quarter and nine months ended September 30, 2021, decreased compared with the same period last year primarily due to increased material and freight costs a less favorable mix of product sales.

For the nine-month period ended September 30, 2021, gross profit margins also reflect one-time inventory reserves in earlier quarters related to our legacy product line, the KNG series.

Gross profit margins for the first quarter ended March 31, 2022, decreased compared with the same period last year primarily due to increased material costs, including electrical components, as well as escalated freight costs, combined with a decline in overall manufacturing volumes, which yielded sub-optimal absorption of manufacturing overhead costs.

We utilize a combination of internal manufacturing capabilities and contract manufacturing relationships for production efficiencies and to manage material and labor costs.

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Although in the future we may encounter new product cost and competitive pricing pressures, the extent of their impact on gross margins, if any, is uncertain.

During recent quarters, worldwide shortages of materials, including semiconductors and integrated circuits, have resulted in limited supplies and extended lead times for certain components used in our products.

While, generally, we have been able to procure the material necessary to manufacture our products and fulfill customer orders, there have been delays, extended lead times and increased costs within our supply chain.

During recent quarters, worldwide shortages of materials, including semiconductors and integrated circuits, have resulted in limited supplies, extended lead times, and higher costs for certain components used in our products.

Accordingly, we have experienced delivery delays and increased costs within our supply chain.

While the progression and duration of these shortages is not known with certainty, 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.

The impact on our operations of such shortages and increased product costs is uncertain, but could potentially impact our future sales, manufacturing operations and financial results.

Selling, General and Administrative Expenses

SG&A expenses consist of marketing, sales, commissions, engineering, product development, management information systems, accounting, headquarters, and non-cash share-based employee compensation expenses.

SG&A expenses for the third quarter ended September 30, 2021, totaled approximately $4.5 million (35.7% of sales), compared with approximately $4.2 million (32.6% of sales) for the same quarter last year.

For the nine months ended September 30, 2021, SG&A expenses decreased by $231,000, or 1.7%, to approximately $13.0 million (40.1% of sales), compared with approximately $13.3 million (39.5% of sales), for the nine-month period last year.

Engineering and product development expenses for the third quarter of 2021 totaled approximately $2.0 million (16.1% of sales), compared with approximately $2.0 million (15.8% of sales) for the same quarter of last year.

For the nine months ended September 30, 2021, engineering and product development expenses totaled approximately $6.2 million (18.9% of sales), compared with approximately $6.1 million (18.1% of sales) for the nine-month period last year.

Engineering expenses for both periods were comparable with the same periods last year.

Expenses for the design and development of the BKR series, a new line of portable and mobile radios, has continued with most ongoing development being performed by our internal engineering team.

Development of the BKR Series is the primary focus of our engineering team.

The precise date for developing and introducing new products is uncertain and can be impacted by, among other things, supply chain shortages and the potential effects of the COVID-19 pandemic in coming months.

Marketing and selling expenses for the third quarter of 2021 totaled approximately $1.0 million (8.2% of sales), compared with approximately $0.9 million (7.3% of sales) for the third quarter last year, primarily reflecting increased commissions attributed to sales growth.

For the nine months ended September 30, 2021, marketing and selling expenses declined approximately $346,000, or 10.2%, to approximately $3.0 million (9.4% of sales), compared with approximately $3.4 million (10.1% of sales).

The decreases for the nine-month period are attributed to reductions in sales and go-to-market employment, as well as other sales, marketing, and go-to-market related expenses.

Other general and administrative expenses for the third quarter 2021 totaled approximately $1.4 million (11.4% of sales), compared with approximately $1.2 million (9.6% of sales) for the same quarter last year.

For the nine months ended September 30, 2021, general and administrative expenses totaled approximately $3.8 million (11.8% of sales), compared with approximately $3.8 million (11.4% of sales) for the nine-month period last year.

Other general and administrative expenses for both periods last year included severance and expenses related to employment reductions.

SG&A expenses for the first quarter ended March 31, 2022, totaled approximately $4.9 million (74.7% of sales), compared with approximately $4.0 million (46.4% of sales) for the same quarter last year.

Engineering and product development expenses for the first quarter of 2022 totaled approximately $2.3 million (35.1% of sales), compared with approximately $1.8 million (21.3% of sales) for the same quarter of last year.

The increase in engineering expenses is attributed primarily to ongoing product design and development activities, particularly prototyping, for the new BKR series radios.

Most of these activities are being performed by our internal engineering team and are their primary focus, combined with sustaining engineering support of our existing products.

Marketing and selling expenses for the first quarter of 2022 totaled approximately $1.0 million (15.2% of sales), compared with approximately $0.9 million (11.0% of sales) for the first quarter last year, primarily reflecting increases in staffing, travel and go-to-market activities in support of anticipated sales growth from new products and customers.

General and administrative expenses for the first quarter 2022 totaled approximately $1.6 million (24.3% of sales), compared with approximately $1.2 million (14.1% of sales) for the same quarter last year.

The increase in general and administrative expenses for the quarter is attributed primarily to corporate and headquarters staffing and strategic initiatives.

Operating Loss

The operating loss for the third quarter ended September 30, 2021, totaled approximately $370,000 (2.9% of sales), compared with operating income of approximately $1.2 million (9.0% of sales), (as adjusted), for last year’s third quarter.

For the nine months ended September 30, 2021, our operating loss totaled approximately $1.4 million (4.4% of sales), compared with operating income of approximately $5,000 (0.0% of sales) (as adjusted) for the nine-month period last year.

The operating loss for the first nine months is attributed primarily to sales mix combined with increased material costs, which adversely impacted gross profit margins.

These factors were partially offset by SG&A expense reductions.

The operating loss for the first quarter ended March 31, 2022, totaled approximately $3.4 million (52.3% of sales), compared with approximately $853,000 (10.0% of sales), (as adjusted), for last year’s first quarter.

The operating loss for the first quarter is attributed primarily to a decrease in sales combined with increased product costs, which adversely impacted gross profit margins, and increased operating expenses.

Other (Expense) Income

We recorded net interest expense of approximately $19,000 for the third quarter ended September 30, 2021, compared with approximately $6,000 for the third quarter of last year.

For the nine months ended September 30, 2021, net interest expense totaled approximately $37,000, compared with approximately $4,000 for the nine-month period last year.

Net interest expense was primarily the result of lower average cash balances and equipment financing.

For the third quarter ended September 30, 2021, we recognized an unrealized loss of approximately $2.2 million on our investment in FGF, compared with an unrealized loss of approximately $291,000 for the third quarter last year.

For the nine months ended September 30, 2021, we recognized an unrealized gain of approximately $310,000 on our investment in FGF, compared with an unrealized loss of approximately $797,000 for the same period last year.

We recorded an income tax expense of $0 and $184,000 for the three and nine months ended September 30, 2021, compared with income tax expense of $2,000 and $30,000 for the same period last year.

We recorded net interest expense of approximately $15,000 for the first quarter ended March 31, 2022, compared with approximately $4,000 for the first quarter of last year.

Net interest expense was primarily the result of equipment financing, our revolving credit facility and lower average cash balances.

For the first quarter ended March 31, 2022, we recognized an unrealized loss of approximately $496,000 on our investment in FGF, compared with an unrealized gain of approximately $205,000 for the first quarter last year.

We recorded no tax provision or benefit for the first quarter ended March 31, 2022 or 2021.

Our income tax provision is based on management’s estimate of the effective tax rate for the full year.

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As a result, we may experience significant fluctuations in the effective book tax rate (that is, tax expense divided by pre-tax book income) from period to period.

As of September 30, 2021, our net deferred tax assets totaled approximately $4.1 million, and were primarily derived from research and development tax credits, operating loss carryforwards and deferred revenue.

As of March 31, 2022, our net deferred tax assets totaled approximately $4.1 million, and were primarily derived from research and development tax credits, operating loss carryforwards and deferred revenue.

In order to fully utilize the net deferred tax assets, we will need to generate sufficient taxable income in future years.

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Based on our analysis of all available evidence, both positive and negative, we have concluded that we do not have the ability to generate sufficient taxable income in the necessary period to utilize the entire benefit for the deferred tax assets.

Accordingly, we established a valuation allowance of $98,000.

Accordingly, we established a valuation allowance of $1.48 million and $610,000 as of March 31, 2022 and December 31, 2021.

We cannot presently estimate what, if any, changes to the valuation of our deferred tax assets may be deemed appropriate in the future.

If we incur future losses, it may be necessary to record additional valuation allowance related to the deferred tax assets recognized as of September 30, 2021.

If we incur future losses, it may be necessary to record additional valuation allowance related to the deferred tax assets recognized as of March 31, 2022.

Liquidity and Capital Resources

For the nine months ended September 30, 2021, net cash used in operating activities totaled approximately $3.6 million, compared with cash provided by operating activities of approximately $3.5 million (as adjusted) for the same period last year.

Cash used in operating activities for the nine months ended September 30, 2021, was primarily related to a net loss, increased inventory, increases in accounts receivable, and an unrealized gain on securities, which were partially offset by increased accounts payable and depreciation and amortization.

For the first nine months of 2021, we had a net loss of approximately $1.4 million, compared with a net loss of approximately $1.0 million (as adjusted) for the same period last year.

Gross inventories increased during the nine months ended September 30, 2021, by approximately $6.1 million (as adjusted), compared with a decrease of approximately $5.1 million (as adjusted) for the same period last year.

The increase for the nine-month period was primarily attributable to extended supplier lead-times and planned new product introductions.

Accounts receivable increased approximately $1.2 million during the nine months ended September 30, 2021, primarily due to the timing of sales that were consummated later in the quarter that had not yet completed their collection cycle.

For the same period last year, accounts receivable increased approximately $1.8 million.

The unrealized gain on securities for the nine months ended September 30, 2021, totaled approximately $310,000, compared with an unrealized loss of approximately $797,000 for the same period last year.

For additional information pertaining to our investment in securities, refer to Note 1 (Condensed Consolidated Financial Statements) and Note 6 (Investment in Securities) to the condensed consolidated financial statements included in this report.

Accounts payable for the nine months ended September 30, 2021, increased approximately $2.4 million, compared with a decrease of approximately $2.2 million for the same period last year, primarily due to purchases from suppliers.

Depreciation and amortization totaled approximately $1.0 million for the nine months ended September 30, 2021, compared with approximately $1.0 million for the same period last year.

For the three months ended March 31, 2022, net cash used in operating activities totaled approximately $3.3 million, compared with cash provided by operating activities of approximately $39,000 (as adjusted) for the same quarter last year.

Cash used in operating activities for the three months ended March 31, 2022, was primarily related to a net loss, increased inventory and increased prepaid expenses, which were partially offset by decreased accounts receivable, increased accounts payable.

For the first quarter of 2022, we had a net loss of approximately $3.9 million, compared with a net loss of approximately $670,000 (as adjusted) for the same quarter last year.

Gross inventories increased during the quarter ended March 31, 2022, by approximately $4.2 million, compared with approximately $1.4 million (as adjusted) for the same quarter last year.

Prepaid expenses increased during the first quarter by approximately $904,000, compared with a decrease of $57,000 for last year’s first quarter.

The increases for both inventories and prepaid expenses were attributed primarily to limited material and component availability combined with extended supplier lead-times and planned new product introductions.

Accounts receivable decreased approximately $3.5 million during the first quarter ended March 31, 2022, compared with a decrease of approximately $1.9 million for last year’s first quarter.

The decrease was primarily due to customer collections combined with decreased sales during the first quarter.

Accounts payable for the first quarter ended March 31, 2022, increased approximately $1.4 million, compared with an increase of approximately $299,000 for the last year’s first quarter, primarily due to increased material and component purchases from suppliers related in-part to delays and shortages within our supply chain.

Depreciation and amortization totaled approximately $342,000 for the first quarter ended March 31, 2022, compared with approximately $298,000 for last year’s first quarter.

Depreciation and amortization are primarily related to manufacturing and engineering equipment.

Cash used in investing activities for the nine months ended September 30, 2021, totaled approximately $1.9 million, primarily for manufacturing equipment.

For the same period last year, cash used in investing activities totaled approximately $742,000, primarily for engineering and manufacturing related equipment.

For the nine months ended September 30, 2021, cash of approximately $12.8 million was provided by financing activities.

In June we closed a public offering of our common stock, generating net proceeds of approximately $11.6 million.

During the nine months ended September 30, 2021, we received proceeds of approximately $3.5 million from our revolving credit facility and from financing related to the purchase of manufacturing equipment.

This was partially offset by loan repayments of approximately $1.5 million.

For the same period last year, we received proceeds totaling approximately $2.2 million under the Paycheck Protection Program, which were repaid in full within the same period.

We used cash of approximately $836,000 and $752,000 to pay quarterly dividends for the nine months ended September 30, 2021and 2020, respectively.

During the first quarter of 2020, we also used approximately $269,000 for stock repurchases.

The unrealized loss on securities for the first quarter ended March 31, 2022, totaled approximately $496,000, compared with an unrealized gain of approximately $205,000 for the first quarter last year.

Cash used in investing activities for the first quarter ended March 31, 2022, totaled approximately $345,000, compared with approximately $1.0 million for last year’s first quarter.

The cash used for both periods was attributed primarily to the purchase of engineering and manufacturing related equipment.

For the first quarter ended March 31, 2022, cash of approximately $583,000 was used in financing activities, compared with cash provided by financing activities of approximately $529,000 for last year’s first quarter.

During the first quarter of 2022 we paid a quarterly dividend, utilizing approximately $505,000, while for last year’s first quarter, we paid a quarterly dividend of approximately $250,000, and we received cash of approximately $779,000 from debt, net of repayments totaling approximately $21,000.

On January 31, 2022, our revolving credit facility, which originated on January 30, 2020, was extended for one year, through January 31, 2023.

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BK Technologies Corporation and each subsidiary of BK Technologies, Inc., are guarantors of the obligations under the Credit Agreement, in accordance with the terms of the Continuing Guaranty.

Borrowings under the Credit Agreement will bear interest at a rate per annum equal to one-month LIBOR (or zero if the LIBOR is less than zero) plus a margin of 1.90%.

The line of credit is to be repaid in monthly payments of interest only, payable in arrears, with all outstanding principal and interest to be payable in full at maturity.

Borrowings under the Credit Agreement will bear interest at the secured overnight financing rate plus a margin of 2.0%.

The line of credit, as modified, is to be repaid in monthly payments of interest only, payable in arrears, commencing on February 1, 2022, with all outstanding principal and interest to be payable in full at maturity (January 31, 2023).

The Credit Agreement contains certain customary restrictive covenants, including restrictions on liens, indebtedness, loans and guarantees, acquisitions and mergers, sales of assets, and stock repurchases by BK Technologies, Inc.

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BK Technologies, Inc.

was in compliance with all covenants under the Credit Agreement as of September 30, 2021, and the date of filing this report.

As of September 30, 2021, and the date of filing this report, approximately $1.5 million in borrowings were outstanding under the Credit Agreement.

was in compliance with all covenants under the Credit Agreement as of March 31, 2022, and the date of filing this report.

As of March 31, 2022, the Company had an outstanding balance of $1,458, and a net balance availability of $2,727 under the Credit Agreement.

As of the date of filing this report, the Company had an outstanding balance of $2,458 , and a net balance availability of $2,542 under the Credit Agreement.

On April 6, 2021, BK Technologies, Inc., a wholly owned subsidiary of BK Technologies Corporation, and JPMC, as a lender, entered into a Master Loan Agreement in the amount of $743,000 to finance various items of manufacturing equipment.

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The Master Loan Agreement is payable in 48 equal monthly principal and interest payments of approximately $16,000 beginning on May 8, 2021, matures on April 8, 2025, and bears a fixed interest rate of 3.0%.

Our cash and cash equivalents balance at September 30, 2021, was approximately $14.1 million.

Our cash and cash equivalents balance at March 31, 2022, was approximately $6.4 million.

We believe these funds, combined with anticipated cash generated from operations and borrowing availability under our Credit Agreement, are sufficient to meet our working capital requirements for the foreseeable future.

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Risk Factors” below in this report.

Critical Accounting Policies

Critical Accounting Policies and Estimates

In response to the Securities and Exchange Commission’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions.

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These estimates and assumptions, if incorrect, could adversely impact our operations and financial position.

Except as discussed below under “Change in Accounting Principle”, there were no changes to our critical accounting policies during the quarter ended September 30, 2021, as described in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Change in Accounting Principle

There were no changes to our critical accounting policies during the quarter ended March 31, 2022.

Change in Accounting Principle During 2021

As disclosed in Note 1 and 4, on July 1, 2021, we changed inventory accounting to burden the material at the time of purchase receipts.

Prior to July 1, 2021, we applied the material burden at the time the inventory was issued to work in progress.

This change resulted in a net increase of approximately $1.3 million in inventory and retained earnings.

The accounting change did not have a material effect on the loss from operations, net loss, or earnings per share for the three and nine months ended September 30, 2021.

This change resulted in a net increase of approximately $1.3 million in inventory and retained earnings as of July 1, 2021.

The accounting change did not have a material effect on the loss from operations, net loss, or earnings per share for the three months ended March 31, 2022.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis