BK Technologies Corp 10-Q

Item 2 . 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, 2021, 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 and our announced SaaS solutions; · 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, inflation, supply-chain constraints, ongoing geopolitical conflicts and related sanctions; · 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; 17 Table of Contents · 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, ongoing geopolitical conflicts and related sanctions, 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, ongoing geopolitical conflicts and related sanctions; · our inventory and debt levels; · protection of our intellectual property rights; · fluctuation in our operating results and stock price; · acts of war or terrorism, natural disasters and other catastrophic events; · any infringement claims; · data security breaches, cyber-attacks and other factors impacting our technology systems; · availability of adequate insurance coverage; · maintenance of our NYSE American listing; · risks related to being a holding company; and · the effect on our stock price and ability to raise equity capital through future sales of shares of our common stock. Some of these factors and risks have been, and may further be, exacerbated by the COVID-19 pandemic. We assume no obligation to publicly update or revise any forward-looking statements made in this report, whether as a result of new information, future events, changes in assumptions or otherwise, after the date of this report. Readers are cautioned not to place undue reliance on these forward-looking statements. Reported dollar amounts in the management’s discussion and analysis (“MD&A”) section of this report are disclosed in millions or as whole dollar amounts. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report and the MD&A, consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 17, 2022, as amended by filing Form 10-K/A with the SEC on April 29, 2022. 18 Table of Contents Executive Overview BK Technologies Corporation is a holding company, with a wholly owned operating subsidiary, BK Technologies, Inc. We design, manufacture and market two-way land mobile radios, repeaters, base stations and related components and subsystems. Two-way land mobile radios can be hand-held (portable) or installed in vehicles (mobile). Repeaters expand the range of two-way land mobile radios, enabling them to operate over a wider area. Base station components and subsystems are installed at radio transmitter sites to improve performance by enhancing the signal and reducing or eliminating signal interference and enabling the use of one antenna for both transmission and reception. We incorporate both analog and digital technologies in our products. Our digital technology is compliant with the Project 25 standard of the Association of Public-Safety Communications Officials. We offer products primarily under the “BK” brand name. Generally, BK-branded products serve the government and public safety market. We also recently launched our business unit dedicated to the development of software-as-a-service (SaaS) solutions. Holding Company Reorganization On March 28, 2019, we implemented a holding company reorganization. The reorganization created a new holding company, BK Technologies Corporation, which became the new parent company of BK Technologies, Inc. The holding company reorganization was intended to create a more efficient corporate structure and increase operational flexibility. We did not incur any material operational or financial impacts. The holding company reorganization was effected through a merger transaction that was a tax-free transaction for U.S. federal income tax purposes for our stockholders. No stockholder vote was required to effect the merger transaction. As part of the holding company reorganization, stockholders of our predecessor, BK Technologies, Inc., became stockholders of BK Technologies Corporation, on a one-for-one basis, with the same number of shares and same ownership percentage of common stock that they held immediately prior to the holding company reorganization. Following the reorganization, BK Technologies Corporation replaced BK Technologies, Inc. as the publicly traded entity, and shares of BK Technologies Corporation were listed on the NYSE American under the symbol “BKTI,” which is the same symbol as previously used by BK Technologies, Inc. In addition, the common stock of BK Technologies Corporation was assigned a new CUSIP Number: 05587G 104. For the purpose of this report, references to “we” or the “Company” or our management or business at any period prior to the holding company reorganization (March 28, 2019) refer to those of BK Technologies, Inc., as the predecessor company and its subsidiaries and thereafter to those of BK Technologies Corporation and its subsidiaries, except as otherwise specified or to the extent the context otherwise indicates. Impact of COVID-19 Pandemic 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. 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. 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. 19 Table of Contents 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 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, 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. 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. 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 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. 20 Table of Contents 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. 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 March 31, 2022 March 31, 2021* Sales 100.0 % 100.0 % Cost of products (77.6 ) (63.6 ) Gross margin 22.4 36.4 Selling, general and administrative expenses (74.7 ) (46.4 ) Other (expense) income (7.5 ) 2.2 (Loss) income before income taxes (59.8 ) (7.8 ) Income tax (expense) benefit (0.0 ) (0.0 ) Net (loss) income (59.8 )% 7.8 % * 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. 21 Table of Contents Net Sales 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. 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 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. 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. 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 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 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. While we anticipate continuing to do so in the future, we have increased, and are continuing to increase, our utilization of U.S.-based resources, which provides greater security and control over our production. We believe that our current manufacturing capabilities and contract relationships or comparable alternatives will continue to be available to us. Although in the future we may encounter new product cost and competitive pricing pressures, the extent of their impact on gross margins, if any, is uncertain. During recent quarters, worldwide shortages of materials, including semiconductors and integrated circuits, have resulted in limited supplies, 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 and increased product costs is uncertain, but could potentially impact our future sales, manufacturing operations and financial results. 22 Table of Contents 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 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. 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 and quarters. 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 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 $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. Income Taxes 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. 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. 23 Table of Contents 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. 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 $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 March 31, 2022. Liquidity and Capital Resources 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. 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. 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. 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. 24 Table of Contents On January 31, 2022, our revolving credit facility, which originated on January 30, 2020, was extended for one year, through January 31, 2023. BK Technologies, Inc., our wholly owned subsidiary, entered into the $5 million Credit Agreement with JPMC. The Credit Agreement provides for a revolving line of credit of up to $5 million, with availability under the line of credit subject to a borrowing base calculated as a percentage of accounts receivable and inventory. Proceeds of borrowings under the Credit Agreement may be used for general corporate purposes. The line of credit is collateralized by a blanket lien on all personal property of BK Technologies, Inc. pursuant to the terms of the Continuing Security Agreement with JPMC. BK Technologies Corporation and each subsidiary of BK Technologies, Inc., are guarantors of the obligations under the Credit Agreement, in accordance with the terms of the Continuing Guaranty. Borrowings under the Credit Agreement will bear interest at 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. The Credit Agreement contains one financial covenant requiring BK Technologies, Inc., to maintain a tangible net worth of at least $20 million at any fiscal quarter end. The Credit Agreement provides for customary events of default, including: (1) failure to pay principal, interest or fees under the Credit Agreement when due and payable; (2) failure to comply with other covenants and agreements contained in the Credit Agreement and the other documents executed in connection therewith; (3) the making of false or inaccurate representations and warranties; (4) defaults under other agreements with JPMC or under other debt or other obligations of BK Technologies, Inc.; (5) money judgments and material adverse changes; (6) a change in control or ceasing to operate business in the ordinary course; and (7) certain events of bankruptcy or insolvency. Upon the occurrence of an event of default, JPMC may declare the entire unpaid balance immediately due and payable and/or exercise any and all remedial and other rights under the Credit Agreement. BK Technologies, Inc. was in compliance with all covenants under the Credit Agreement as of 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. The loan is collateralized by the equipment purchased using the proceeds. The Master Loan Agreement is payable in 48 equal monthly principal and interest payments of approximately $16,000 beginning on May 8, 2021, matures on April 8, 2025, and bears a fixed interest rate of 3.0%. 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. 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, 2021, and “Item 1A. Risk Factors” below in this report. 25 Table of Contents Critical Accounting Policies and Estimates In response to the Securities and Exchange Commission’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions. These processes affect our reported revenues and current assets and are, therefore, critical in assessing our financial and operating status. We regularly evaluate these processes in preparing our financial statements. The processes for revenue recognition, allowance for collection of trade receivables, allowance for excess or obsolete inventory, and income taxes involve certain assumptions and estimates that we believe to be reasonable under present facts and circumstances. These estimates and assumptions, if incorrect, could adversely impact our operations and financial position. 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 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. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a smaller reporting company, the Company is not required to include the disclosure under this Item.