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, including any information incorporated by reference in 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, as amended, and 21E of the Exchange Act, including the statements about our plans, objectives, expectations and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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. We also may make forward-looking statements in other documents that are filed or furnished with the SEC. In addition, we may make forward-looking statements orally or in writing to investors, analysts, members of the media, or others. Forward-looking statements include, but are not limited to, the following: changes or advances in technology; the success of our SaaS and Radio business lines and the products offered thereunder; successful introduction of new products and technologies, including our ability to successfully develop and sell our anticipated SaaS products, and our new multiband radio product and other related products in the planned new BKR Series product line; competition in the LMR industry; general economic and business conditions, including federal, state and local government budget deficits and spending limitations and any impact from a prolonged shutdown of the U.S. Government; the availability, terms and deployment of capital; reliance on contract manufacturers and suppliers; risks associated with fixed-price contacts; heavy reliance on sales to agencies of the U.S. Government and our ability to comply with the requirements of contracts, laws and regulations related to such sales; allocations by government agencies among multiple approved suppliers under existing agreements; our ability to comply with U.S. tax laws and utilize deferred tax assets; our ability to attract and retain executive officers, skilled workers and key personnel; our ability to manage our growth; our ability to identify potential candidates for, and consummate, acquisition, disposition or investment transactions, and risks incumbent to being a noncontrolling interest stockholder in a corporation; 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; 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 of future sales of shares of our common stock. 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. Any forward-looking statement made by us or on our behalf speaks only as of the date that it was made. We do not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made, except as required by applicable securities laws. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that we may make in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K. 16 Table of Contents 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, 2022, 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 SaaS solution; · 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 inflation, rising interest rates, bank failures, 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; · our ability to identify potential candidates and consummate acquisition, disposition or investment transactions, and risks incumbent to being a noncontrolling interest stockholder in a corporation; · the impact of general business conditions, including those resulting from inflation, rising interest rates, bank failures, 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 inflation, rising interest rates, bank failures, ongoing geopolitical conflicts and related sanctions; 17 Table of Contents · 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, public health crises, 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 general economic conditions, including the ongoing military conflict in Ukraine, such as inflationary pressures and disruptions in the global supply chain. 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, 2022, filed with the SEC on March 16, 2023. Executive Summary BK Technologies Corporation (NYSE American: BKTI) (together with its wholly owned subsidiaries, “BK,” the “Company,” “we” or “us”) is a holding company that, through BK Technologies, Inc., its operating subsidiary, provides public safety grade communications products and services which make first responders safer and more efficient. All operating activities described herein are undertaken by our operating subsidiary. In business for over 70 years, BK operates two business units through its operating subsidiary, BK Technologies, Inc.: Radio and SaaS. The Radio business unit designs, manufactures and markets American-made wireless communications products consisting of two-way land mobile radios (“LMRs”). Two-way LMRs can be radios that are hand-held (portable) or installed in vehicles (mobile). Generally, BK Technologies-branded products serve the government markets, including but not limited to, emergency response, public safety, homeland security and military customers of federal, state and municipal government agencies, as well as various industrial and commercial enterprises. We believe that our products and solutions provide superior value by offering a high specification, ruggedized, durable, reliable, feature rich, Project 25-compliant radio at a lower cost relative to comparable offerings. 18 Table of Contents The SaaS business unit focuses on delivering innovative, public safety smartphone applications that operate ubiquitously over public cellular networks. Our BKRplay branded smartphone application will offer multiple services that make first responders safer and more efficient. When tethered to our radios, the combined solution will offer a unique capability which increases the sales reach of our radios. We were incorporated under the laws of the State of Nevada on October 24, 1997. We are the corporation resulting from the reincorporation merger of our predecessor, Adage, Inc., a Pennsylvania corporation, which reincorporated from Pennsylvania to Nevada effective as of January 30, 1998. Effective on June 4, 2018, we changed our corporate name from “RELM Wireless Corporation” to “BK Technologies, Inc.” Our principal executive offices are located at 7100 Technology Drive, West Melbourne, Florida 32904 and our telephone number is (321) 984-1414. Customer demand and orders for our products were strong during 2022. Supply chain constraints limited our ability to manufacture the quantities needed to ship and fulfill all the orders during 2022. Consequently, approximately 13,000 radio units were carried in backlog as of December 31, 2022, and we fulfilled approximately 76% of these radio units during the first half of 2023. Our backlog of unshipped customer orders was approximately $24.0 million and $27.0 million as of June 30, 2023, and December 31, 2022, respectively. Changes in the backlog are attributed primarily to the timing of orders and their fulfillment. For the three months ended June 30, 2023, sales grew approximately 56.9% to approximately $19.0 million, compared with $12.1 million for the prior year period. The growth was attributed primarily to the BKR 5000 product and the fulfillment of the 2022 backlog described above. Gross profit margins as a percentage of sales for the three months ended June 30, 2023, were 27.4%, compared with 14.2% for the prior year, generally reflecting higher production volumes and improvement in material, component and freight costs. Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2023, totaled approximately $6.0 million (31.5% of sales), compared with $5.4 million (44.6% of sales) last year. We recognized an operating loss for the three months ended June 30, 2023, of approximately $0.8 million, compared with an operating loss of approximately $3.7 million for the same period for the prior year. For the three months ended June 30, 2023, we recognized other expenses, net totaling approximately $0.6 million, primarily attributed to net unrealized losses from our investment in FG Financial Holdings, LLC. and interest expense on our Line of Credit. This compares with other expenses, net totaling $0.7 million for the same period last year, which was also primarily related to an unrealized loss from the investment in FG Financial Group, Inc. For the three months ended June 30, 2023, the pretax loss totaled approximately $1.3 million, compared with pretax loss of approximately $4.3 million for same period of the prior year. For the six months ended June 30, 2023, the pretax loss totaled approximately $2.6 million, compared with pretax loss of approximately $8.3 million for same period of the prior year. We recognized no tax expense for the three and six-month periods ended June 30, 2023, and for the same period of the prior year. The net loss for the three months ended June 30, 2023, totaled approximately $1.3 million ($0.39 per basic and diluted share), compared with net loss of approximately $4.3 million ($1.28 per basic and diluted share) for the same period last year. The primary factors for the improvement for the three months ended June 30, 2023, compared to the same period last year, were higher production volumes and lower raw material and freight costs related to electronic component shortages from supply chain disruptions. The net loss for the six months ended June 30, 2023, totaled approximately $2.6 million ($0.77 per basic and diluted share), compared with net loss of approximately $8.3 million ($2.45 per basic and diluted share) for the six-month period last year. The primary factors for the improvement for the six-months ended June 30, 2023, compared to the same period last year were higher production volumes and lower raw material and freight costs related to electronic component shortages from supply chain disruptions. 19 Table of Contents As of June 30, 2023, working capital totaled approximately $12.4 million, of which $11.9 million was comprised of cash, cash equivalents and trade receivables. This compares with working capital totaling approximately $13.2 million at 2022 year-end, which included $12.5 million of cash, cash equivalents and trade receivables. Available Information Our Internet website address is www.bktechnologies.com. We make available on our Internet website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to these reports as soon as practicable after we file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the “SEC”). In addition, our Code of Business Conduct and Ethics, Code of Ethics for the CEO and Senior Financial Officers, Audit Committee Charter, Compensation Committee Charter, Nominating and Governance Committee Charter and other corporate governance policies are available on our website, under “Investor Relations.” The information contained on our website is not incorporated by reference in this report. A copy of any of these materials may be obtained, free of charge, upon request from our investor relations department by submitting a written request to bktechnologies@imsinvestorrelations.com or calling (203) 972-9200. Additional information regarding our investor relations department can be found on our website. All reports that the Company files with or furnishes to the SEC are also available free of charge via the SEC’s website at http://www.sec.gov. Second Quarter and Six Months Summary 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. We received record customer orders of approximately $70 million in 2022. Customer demand and orders for our products continued to be strong during the three months ended June 30, 2023. Worldwide shortages of materials, particularly semiconductors and integrated circuits, resulting in part from the impact of COVID-19 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, we have experienced some delays and longer delivery times within our supply chain in the year ended December 31, 2022. 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. These supply chain constraints and material shortages limited our ability to manufacture the quantities needed to ship and fulfill all of the orders that we received in 2022. Consequently, we had approximately 13,000 radio units that were carried in backlog as of December 31, 2022, and we fulfilled approximately 76% of these radio units during the six-months ended June 30, 2023. 20 Table of Contents Overall, our revenues for the three months ended June 30, 2023, increased compared with the same period of last year. For the second quarter 2023, sales increased 56.9% to approximately $19.0 million, compared with approximately $12.1 million of sales for the second quarter last year. The improvement in sales for the six-months ended June 30, 2023, increased 101.7% compared to the same six-month period last year. Gross profit margin as a percentage of sales for the second quarter of 2023 was approximately 27.4%, compared with 14.2% for the same period of last year, generally reflecting improvements in increased production volumes and improvements in supply chain material costs and freight compared to the second quarter last year. Gross profit margin as a percentage of sales for the six months ended June 30, 2023, was approximately 26.8%, compared with 17.1% for the same period of last year, generally reflecting improvements in supply chain material and freight costs and increased production volumes. Selling, general and administrative (“SG&A”) expenses for the second quarter of 2023 totaled approximately $6.0 million, which was 10.8% higher than the SG&A expenses of approximately $5.4 million for the second quarter last year, while SG&A expenses for the six-month period ended June 30, 2023, increased 15.0% compared to the same period last year. The increase in SG&A expenses is attributed primarily to sales and engineering costs related to the BKR 9000 product introduction. These factors yielded an operating loss of approximately $0.8 million for the three-month period ended June 30, 2023, compared with an operating loss of approximately $3.7 million for the same quarter last year, which improved primarily due to higher production volumes and reduced supply chain material challenges compared to the same period last year. For the second quarter of 2023, we recognized a net unrealized loss totaling approximately $0.4 million on our investment in FG Financial Holdings, LLC., or “FG Holding”. This compares with an unrealized loss of approximately $0.6 million on the investment in FG Financial Group, Inc. made through FG 1347 Holdings, LP, for the second quarter of last year. For the six months ended June 30, 2023, we recognized a net unrealized loss totaling approximately $0.5 million on our investment in FG Financial Holdings, LLC. compared with an unrealized loss of approximately $1.1 million on the investment in FG Financial Group, Inc. made through FG 1347 Holdings, LP, for last year’s six-month period. Net loss for the three months ended June 30, 2023, was approximately $1.3 million ($0.39 per basic and diluted share), compared with a net loss of approximately $4.3 million ($1.28 per basic and diluted share) for the same quarter last year. For the six months ended June 30, 2023, our net loss totaled approximately $2.6 million ($0.77 per basic and diluted share), compared with a net loss of approximately $8.3 million ($2.45 per basic and diluted share) for the same period last year. As of June 30, 2023, working capital totaled approximately $12.4 million, of which approximately $11.9 million was comprised of cash, cash equivalents and trade receivables. As of December 31, 2022, working capital totaled approximately $13.2 million, of which approximately $12.5 million was comprised of cash, cash equivalents and trade receivables. 21 Table of Contents Results of Operations As an aid to understanding our operating results for the periods covered by this report, the following table shows selected items from our condensed consolidated statements of operations expressed as a percentage of sales: Percentage of Sales Three Months Ended Percentage of Sales Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of products (72.6 ) (85.8 ) (73.2 ) (82.9 ) Gross margin 27.4 14.2 26.8 17.1 Selling, general and administrative expenses (31.5 ) (44.6 ) (31.5 ) (55.2 ) Other income (expense) (3.0 ) (5.4 ) (2.2 ) (6.1 ) Loss before income taxes (7.1 ) (35.8 ) (6.9 ) (44.2 ) Income tax (expense) benefit -- -- -- -- Net loss (7.1 )% (35.8 )% (6.9 )% (44.2 )% Net Sales For the second quarter ended June 30, 2023, net sales increased 56.9% to approximately $19.0 million, compared with approximately $12.1 million for the same quarter last year. Sales for the six months ended June 30, 2023, totaled approximately $37.7 million, compared with approximately $18.7 million for the six-month period last year. Customer demand and orders for our products continued to be strong, reflecting the acceptance by the marketplace for our BKR 5000 product. We were able to fulfill approximately 76% of the radio units in backlog as of December 31, 2022, during the first six months of this year. The supply chain issues experienced in 2022 have improved significantly, but the precise impact on sales and shipments for the remainder of 2023 cannot be quantified, hence we anticipate maintaining an elevated level of inventory. Sales for the second quarter ended June 30, 2023, were 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 second quarter was our BKR 5000 portable radio and related accessories. The BKR Series is envisioned as a comprehensive line of new products, which includes new models such as the BKR 9000, which achieved FCC P25 compliance testing and its first sales in the second quarter. The timing of developing additional BKR Series products and bringing them to market could be impacted by various factors, including potential impacts on our supply chain as a result of various electronic component suppliers. We believe that the BKR Series products 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 current inflationary environment 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, gross profit margins, operations, and financial results. 22 Table of Contents Cost of Products and Gross Profit Margin Gross profit margins as a percentage of sales for the second quarter ended June 30, 2023, were approximately 27.4% compared with 14.2% for the same quarter last year. For the six-month period ended June 30, 2023, gross profit margins were approximately 26.8%, compared with 17.1% for the same period last year. Our cost of products and gross profit margins are primarily derived from material, labor and overhead costs, product mix, manufacturing volumes and pricing. Gross profit margins for the quarter ended June 30, 2023, increased compared with the same period last year, primarily due to improvement in production volumes related to supply shortages, material costs, including electronic components, and to a lesser degree, easing of escalated freight costs. During the year ended December 31, 2022, worldwide shortages of materials, including semiconductors and integrated circuits resulted in limited supplies, which in turn, extended lead times and resulted in higher costs for certain components used in our products. Accordingly, we experienced delivery delays and increased costs within our supply chain. While the progression and duration of these shortages is not known with certainty, we monitored a number of critical components for product cost improvement and have experienced improvement to pre-pandemic levels. 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. However, we may encounter new product cost and competitive pricing pressures in the future and the extent of their impact on gross margins, if any, is uncertain. Selling, General and Administrative Expenses SG&A expenses consist of marketing, sales, commissions, engineering, product development, management information systems, accounting, headquarters, and non-cash share-based employee compensation expenses. SG&A expenses for the second quarter ended June 30, 2023, totaled approximately $6.0 million (31.5% of sales), compared with approximately $5.4 million (44.6% of sales) for the same quarter last year. For the six months ended June 30, 2023, SG&A expenses increased by $1.6 million, or 15.0%, to approximately $11.9 million (31.5% of sales), compared with approximately $10.3 million (55.2% of sales), for the six-month period last year. Engineering and product development expenses for the second quarter of 2023 totaled approximately $2.6 million (13.7% of sales), compared with approximately $2.3 million (12.1% of sales) for the same quarter of last year. For the six months ended June 30, 2023, engineering and product development expenses totaled approximately $5.0 million (13.3% of sales), compared with approximately $4.6 million (24.6% of sales) for the six month period last year. The increase in engineering expenses is attributed primarily to ongoing product design and development activities, particularly for the new BKR 9000 series radio introduced during the second quarter 2023. 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 certain component lead times in coming months and quarters. Marketing and selling expenses for the second quarter of 2023 totaled approximately $1.5 million (8.0% of sales), compared with approximately $1.1 million (5.8% of sales) for the second quarter last year. For the six months ended June 30, 2023, marketing and selling expenses increased approximately $1.0 million, or 47.5%, to approximately $3.1 million (8.1% of sales), compared with approximately $2.1 million (11.1% of sales) for the same period last year. The increases for the quarter and six month period ended June 30, 2023, primarily reflect increases in staffing, travel and go-to-market activities in support of anticipated sales growth from new products and customers. 23 Table of Contents Other general and administrative expenses for the second quarter 2023 totaled approximately $1.9 million (9.8% of sales), compared with approximately $2.0 million (10.5% of sales) for the same quarter last year. For the six months ended June 30, 2023, general and administrative expenses totaled approximately $3.8 million (10.1% of sales), compared with approximately $3.6 million (19.4% of sales) for the six month period last year. The increase in general and administrative expenses for the quarter and six months ended June 30, 2023, is attributed primarily to corporate and headquarters staffing in support of strategic initiatives. Operating Loss The operating loss for the second quarter ended June 30, 2023, totaled approximately $0.8 million (4.1% of sales), compared with approximately $3.7 million (30.4% of sales) for last year’s second quarter. For the six months ended June 30, 2023, our operating loss totaled approximately $1.8 million (4.7% of sales), compared with approximately $7.1 million (38.1% of sales) for the six month period last year. The operating loss for the quarter and six months ended June 30, 2023, is somewhat attributed to lower than historical gross profit margins related to operating costs and increased product introduction and strategic initiative costs. Other (Expense) Income We recorded net interest expense of approximately $155,000 for the second quarter ended June 30, 2023, compared with approximately $24,000 for the second quarter of last year. For the six months ended June 30, 2023, net interest expense totaled approximately $298,000, compared with net interest expense of approximately $39,000 for the six month period last year. Net interest expense was primarily the result our Line of Credit and equipment financing. For the second quarter ended June 30, 2023, we recognized an unrealized loss of approximately $0.4 million on our investment in FG Holdings, compared with an unrealized loss of approximately $0.6 million in FG Financial Group, Inc. made through FG 1347 Holdings, LP for the second quarter last year. For the six months ended June 30, 2023, we recognized an unrealized loss of approximately $0.5 million on our investment compared with an unrealized loss of approximately $1.1 million for the same period last year. Income Taxes We recorded no tax expense or benefit for the quarter and six months ended June 30, 2023, compared with no income tax provision for the second quarter and six month period last year. Our income tax provision is based on management’s estimate of the effective tax rate for the full year. The tax provision (benefit) in any period will be affected by, among other things, permanent, as well as temporary, differences in the deductibility of certain items, in addition to changes in tax legislation. As a result, we may experience significant fluctuations in the effective book tax rate (that is, tax expense divided by pre-tax book income) from period to period. As of June 30, 2023, 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 $4.1 million as of both June 30, 2023, and December 31, 2022. We cannot presently estimate what, if any, changes to the valuation of our deferred tax assets may be deemed appropriate in the future. If we incur future losses, it may be necessary to record additional valuation allowance related to the deferred tax assets recognized as of June 30, 2023. 24 Table of Contents Liquidity and Capital Resources For the six months ended June 30, 2023, net cash provided by operating activities totaled approximately $1.5 million, compared with cash used by operating activities of approximately $5.3 million for the same period last year. Cash provided by operating activities for the six months ended June 30, 2023, was primarily related to a reduction in accounts receivable and an increase in deferred revenues, which was partially offset by decrease in accounts payable. Cash used in operating activities for the six months ended June 30, 2022, was primarily related to a net loss and increased inventory, which were partially offset by increased accounts payable, a decrease in accounts receivable and an unrealized loss in marketable securities. For the first six months of 2023, we had a net loss of approximately $2.6 million, compared with a net loss of approximately $8.3 million for the same period last year. Accounts receivable decreased approximately $1.4 million during the six months ended June 30, 2023, compared with a decrease of approximately $1.7 million for the same period last year. Accounts payable for the quarter ended June 30, 2023, decreased approximately $0.3 million, compared with an increase of approximately $3.9 million for the first six months last year, primarily due to delays and shortages within our supply chain for the same period of 2022. Gross inventories increased during the six months ended June 30, 2023, by approximately $0.7 million compared with approximately $5.6 million for the same period last year. The increases for both inventories and accounts payable during the first six months of 2022 were attributed primarily to material and component availability combined with extended supplier lead times. Prepaid expenses decreased during the first six months of 2023 by approximately $0.3 million compared with a decrease of $0.4 million for the same period last year. Depreciation and amortization totaled approximately $0.8 million for the six months ended June 30, 2023, compared with approximately $0.7 million for the same period last year. Depreciation and amortization are primarily related to manufacturing and engineering equipment. The unrealized loss on investments for the six months ended June 30, 2023, totaled approximately $0.5 million, compared with an unrealized loss of approximately $1.1 million for the same period last year. For additional information pertaining to our investments, refer to Note 1 (Condensed Consolidated Financial Statements) and Note 6 (Investments) to the condensed consolidated financial statements included in this report. Cash used in investing activities for the six months ended June 30, 2023, totaled approximately $0.9 million, compared with approximately $0.7 million for the same period last year. The cash used for both periods was attributed primarily to the purchase of engineering and manufacturing related equipment. For the six months ended June 30, 2023, cash of approximately $0.1 million was provided by financing activities, compared with cash provided by financing activities of approximately $1.3 million for the same period last year. During the first six months of 2023, we received cash of approximately $40.7 million from debt, net of repayments totaling approximately $40.6 million, while for the same period last year, we received proceeds of approximately $2.5 million from our revolving credit facility and notes payable partially offset by loan and revolving credit facility repayments of approximately $0.1 million and paid quarterly dividends of approximately $1.0 million. Our cash and cash equivalents balance on June 30, 2023, was approximately $2.7 million. We believe these funds, combined with anticipated cash generated from operations and borrowing availability under the IPSA, 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, which could be impacted by the current inflationary environment and current geopolitical tension, could limit our access to credit and impair our ability to raise capital, if needed, on acceptable terms or at all. 25 Table of Contents Critical Accounting Policies In response to the Securities and Exchange Commission’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions. These processes affect our reported revenues and current assets and are, therefore, critical in assessing our financial and operating status. We regularly evaluate these processes in preparing our financial statements. The processes for revenue recognition, allowance for collection of trade receivables, allowance for excess or obsolete inventory and income taxes involve certain assumptions and estimates that we believe to be reasonable under present facts and circumstances. These estimates and assumptions, if incorrect, could adversely impact our operations and financial position. There were no changes to our critical accounting policies during the three months ended June 30, 2023. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a “smaller reporting company” as defined by Item 229.10(f)(1) of Regulation S-K, the Company is not required to include the disclosure under this Item.