What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 100 added, 103 removed, 170 unchanged (54% of the section changed)

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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.

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:

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 SEC, 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;

the success of our LMR product line;

successful introduction of new products and technologies, including our ability to successfully develop and sell our new multiband product and other related products in the planned new BKR Series product line and our SaaS solution;

competition in the LMR 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.

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Radio and SaaS.

The Radio business unit designs, manufactures and markets American-made wireless communications products consisting of two-way land mobile radios (“LMRs”).

The Radio business unit designs, manufactures and markets American-made wireless communications products consisting of two-way LMRs.

Two-way LMRs can be radios that are hand-held (portable) or installed in vehicles (mobile).

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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.

Consequently, approximately 13,000 radio units were carried in backlog as of December 31, 2022, and we fulfilled approximately 83% of these radio units during the first nine months of 2023.

Our backlog of unshipped customer orders was approximately $21.8 million and $27.0 million as of September 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.

For the three months ended September 30, 2023, sales grew approximately 68.4% to approximately $20.1 million, compared with $11.9 million for the prior year period.

The growth was attributed primarily to the BKR 5000 and BKR 9000 products and the fulfillment of the 2022 backlog described above.

Gross profit margins as a percentage of sales for the three months ended September 30, 2023, were 31.9%, compared with 18.8% for the prior comparative quarter, 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 September 30, 2023, totaled approximately $5.8 million (29.0% of sales), compared with $4.6 million (38.9% of sales) in the same period of last year.

We recognized operating income for the three months ended September 30, 2023, of approximately $0.6 million, compared with an operating loss of approximately $2.4 million for the same period for the prior year.

For the three months ended September 30, 2023, we recognized other expenses, net totaling approximately $0.5 million, primarily attributed to net unrealized losses from our investment in 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.

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 other expenses, net totaling $11,000 for the same period last year, which included an unrealized gain on the investment in FG Holdings LLC that was offset by interest and other expenses.

For the three months ended September 30, 2023, the pretax income totaled approximately $90,000, compared with pretax loss of approximately $2.4 million for same period of the prior year.

For the nine months ended September 30, 2023, the pretax loss totaled approximately $2.5 million, compared with pretax loss of approximately $10.7 million for same period of the prior year.

We recognized no tax expense for the three and nine-month periods ended September 30, 2023, and for the same periods of the prior year.

The net income for the three months ended September 30, 2023, totaled approximately $90,000 ($0.03 per basic and diluted share), compared with a net loss of approximately $2.4million ($0.71 per basic and diluted share) for the same period last year.

The primary factors for the improvement for the three months ended September 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 nine months ended September 30, 2023, totaled approximately $2.5 million ($0.74 per basic and diluted share), compared with net loss of approximately $10.7 million ($3.16 per basic and diluted share) for the nine-month period last year.

The primary factors for the improvement for the nine months ended September 30, 2023, compared to the same period last year were higher production volumes and lower raw material and freight costs.

As of September 30, 2023, working capital totaled approximately $13.8 million, of which $13.2 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.

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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.

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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

Third Quarter and Nine 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.

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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.

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

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.

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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.

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.

Consequently, we had approximately 13,000 radio units that were carried in backlog as of December 31, 2022, and we fulfilled approximately 83% of these radio units during the nine months ended September 30, 2023.

Overall, our revenues for the three months ended September 30, 2023, increased compared with the same period of last year.

For the third quarter 2023, sales increased 68.4% to approximately $20.1 million, compared with approximately $11.9 million of sales for the third quarter last year.

Sales for the nine months ended September 30, 2023, increased 88.8% compared to the same nine-month period last year.

Gross profit margin as a percentage of sales for the third quarter of 2023 was approximately 31.9%, compared with 18.8% 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 third quarter last year.

Gross profit margin as a percentage of sales for the nine months ended September 30, 2023, was approximately 28.6%, compared with 17.8% 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 third quarter of 2023 totaled approximately $5.8 million, which was 25.5% higher than the SG&A expenses of approximately $4.6 million for the third quarter last year, while SG&A expenses for the nine-month period ended September 30, 2023, increased 18.3% 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.

These factors yielded operating income of approximately $0.6 million for the three-month period ended September 30, 2023, compared with an operating loss of approximately $2.4 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 third quarter of 2023, we recognized a net unrealized loss totaling approximately $0.3 million on our investment in FG Holdings LLC.

This compares with net realized and unrealized gains of approximately $0.1 million, for the third quarter of last year.

For the nine months ended September 30, 2023, we recognized a net unrealized loss totaling approximately $0.8 million on our investment in FG Holdings LLC.

compared with a recognized net realized and unrealized losses of approximately $1.0 million, for last year’s nine-month period.

Net income for the three months ended September 30, 2023, was approximately $90,000 ($0.03 per basic and diluted share), compared with a net loss of approximately $2.4 million ($0.71 per basic and diluted share) for the same quarter last year.

For the nine months ended September 30, 2023, our net loss totaled approximately $2.5 million ($0.74 per basic and diluted share), compared with a net loss of approximately $10.7 million ($3.16 per basic and diluted share) for the same period last year.

As of September 30, 2023, working capital totaled approximately $13.8 million, of which approximately $13.2 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.

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Percentage of Sales

Six Months Ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Nine Months Ended

Sept 30, 2023

Sept 30, 2022

Sept 30, 2023

Sept 30, 2022

Cost of products

Selling, general and administrative expenses

Other income (expense)

Loss before income taxes

Other expense, net

Income (loss) before income taxes

Income tax (expense) benefit

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.

Net income (loss)

For the third quarter ended September 30, 2023, net sales increased 68.4% to approximately $20.1 million, compared with approximately $11.9 million for the same quarter last year.

Sales for the nine months ended September 30, 2023, totaled approximately $57.8 million, compared with approximately $30.6 million for the nine-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.

We were able to fulfill approximately 83% of the radio units in backlog as of December 31, 2022, during the first nine months of this year.

The supply chain issues experienced in 2022 have diminished 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 third quarter ended September 30, 2023, were attributed primarily to federal wildland fire related agencies and certain state and local public safety opportunities.

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

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.

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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.

Gross profit margins as a percentage of sales for the third quarter ended September 30, 2023, were approximately 31.9% compared with 18.8% for the same quarter last year.

For the nine-month period ended September 30, 2023, gross profit margins were approximately 28.6%, compared with 17.8% 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.

Gross profit margins for the quarter and nine months ended September 30, 2023, increased compared with the same periods 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.

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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.

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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.

SG&A expenses for the third quarter ended September 30, 2023, totaled approximately $5.8 million (29.0% of sales), compared with approximately $4.6 million (38.9% of sales) for the same quarter last year.

For the nine months ended September 30, 2023, SG&A expenses increased by $2.7 million, or 18.3%, to approximately $17.7 million (30.6% of sales), compared with approximately $15.0 million (48.8% of sales), for the nine-month period last year.

Engineering and product development expenses for the third quarter of 2023 totaled approximately $2.5 million (12.5% of sales), compared with approximately $2.1 million (17.9% of sales) for the same quarter of last year.

For the nine months ended September 30, 2023, engineering and product development expenses totaled approximately $7.5 million (13.0% of sales), compared with approximately $6.7 million (22.0% of sales) for the nine-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.

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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.

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.

Marketing and selling expenses for the third quarter of 2023 totaled approximately $1.5 million (7.5% of sales), compared with approximately $1.1 million (8.9% of sales) for the third quarter last year.

For the nine months ended September 30, 2023, marketing and selling expenses increased approximately $1.4 million, or 46.0%, to approximately $4.6 million (7.9% of sales), compared with approximately $3.1 million (10.2% of sales) for the same period last year.

The increases for the quarter and nine-month period ended September 30, 2023, primarily reflect increases in staffing, travel and go-to-market activities in support of anticipated sales growth from new products and customers.

Other general and administrative expenses for the third quarter 2023 totaled approximately $1.8 million (9.0% of sales), compared with approximately $1.4 million (12.1% of sales) for the same quarter last year.

For the nine months ended September 30, 2023, general and administrative expenses totaled approximately $5.6 million (9.7% of sales), compared with approximately $5.1 million (16.6% of sales) for the nine-month period last year.

The increase in general and administrative expenses for the quarter and nine months ended September 30, 2023, is attributed primarily to corporate and headquarters staffing in support of strategic initiatives.

Operating Income (Loss)

The operating income for the third quarter ended September 30, 2023, totaled approximately $0.6 million (2.9% of sales), compared with an operating loss of approximately $2.4 million (20.1% of sales) for last year’s third quarter.

For the nine months ended September 30, 2023, our operating loss totaled approximately $1.2 million (2.0% of sales), compared with approximately $9.5 million (31.1% of sales) for the nine-month period last year.

The operating loss for the quarter and nine months ended September 30, 2022, 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.

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.

We recorded net interest expense of approximately $131,000 for the third quarter ended September 30, 2023, compared with approximately $30,000 for the third quarter of last year.

For the nine months ended September 30, 2023, net interest expense totaled approximately $429,000, compared with net interest expense of approximately $70,000 for the nine-month period last year.

Net interest expense was primarily the result of our Line of Credit and equipment financing.

For the third quarter ended September 30, 2023, we recognized an unrealized loss of approximately $0.3 million on our investment in FG Holdings LLC, compared with a realized and unrealized gain of approximately $0.1 million on our investment in FGF made through 1347 LP for the third quarter last year.

For the nine months ended September 30, 2023, we recognized an unrealized loss of approximately $0.8 million on our investment compared with a realized and unrealized loss of approximately $1.0 million for the same period last year.

We recorded no tax expense or benefit for the quarter and nine months ended September 30, 2023, compared with no income tax provision for the third quarter and nine-month period last year.

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 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.

As of September 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.

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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 $4.1 million as of both June 30, 2023, and December 31, 2022.

Accordingly, we established a valuation allowance of $4.2 million and $3.4 million as of September 30, 2023, and December 31, 2022, respectively.

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.

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, 2023.

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.

For the nine months ended September 30, 2023, net cash provided by operating activities totaled approximately $3.9 million, compared with cash used by operating activities of approximately $6.9 million for the same period last year.

Cash provided by operating activities for the nine months ended September 30, 2023, was primarily related to a reduction in accounts receivable and inventories, and an increase in deferred revenues, which was partially offset by decrease in accounts payable.

Cash used in operating activities for the nine months ended September 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 a realized and unrealized losses in marketable securities.

For the first nine months of 2023, we had a net loss of approximately $2.5 million, compared with a net loss of approximately $10.7 million for the same period last year.

Accounts receivable decreased approximately $1.5 million during the nine months ended September 30, 2023, compared with a decrease of approximately $2.9 million for the same period last year.

Accounts payable for the nine months ended September 30, 2023, decreased approximately $1.1 million, compared with an increase of approximately $7.4 million for the first nine months last year, primarily due to delays and shortages within our supply chain for the same period of 2022.

Gross inventories decreased during the nine months ended September 30, 2023, by approximately $0.6 million compared with an increase of approximately $9.4 million for the same period last year.

The increases for both inventories and accounts payable during the first nine months of 2022 were attributed primarily to material and component availability combined with extended supplier lead times.

Deferred revenues increased during the nine months ended September 30, 2023, by approximately $2.7 million compared with an increase of approximately $0.2 million for the same period last year.

Prepaid expenses increased during the first nine months of 2023 by approximately $0.4 million compared with an increase of $0.1 million for the same period last year.

Depreciation and amortization totaled approximately $1.2 million for the nine months ended September 30, 2023, compared with approximately $1.1 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.

The unrealized loss on investments for the nine months ended September 30, 2023, totaled approximately $0.8 million, compared with a realized and unrealized losses of approximately $1.0 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.

Cash used in investing activities for the nine months ended September 30, 2023, totaled approximately $1.8 million, compared with approximately $1.0 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.

For the nine months ended September 30, 2023, cash of approximately $43,000 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 nine months of 2023, we received cash of approximately $58.9 million from debt, net of repayments totaling approximately $58.9 million, while for the same period last year, we received proceeds of approximately $3.0 million from our revolving credit facility with Alterna and notes payable partially offset by loan and revolving credit facility repayments of approximately $0.2 million and paid quarterly dividends of approximately $1.5 million.

Our cash and cash equivalents balance on September 30, 2023, was approximately $4.1 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.

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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.

In response to the SEC’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.

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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.

There were no changes to our critical accounting policies during the three months ended September 30, 2023.

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