BK Technologies Corp 10-K

Item 8. Financial Statements and Supplementary Data. 30 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders BK Technologies Corporation West Melbourne, Florida Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of BK Technologies Corporation (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As a part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Slow-Moving, Excess, and Obsolete Inventory As disclosed in Note 1 of the Company’s consolidated financial statements, the Company records an estimated allowance for slow-moving, excess, and obsolete inventory to state the Company’s inventories at the lower of cost or net realizable value. The Company relies on, among other things, past usage/sales experience, future sales forecasts, and its strategic business plan to develop the estimate. As a result of management’s assessment, the Company recorded an allowance for slow-moving, excess, and obsolete inventory of approximately $1,838,000 as of December 31, 2023. Auditing management’s estimate of the allowance for slow-moving, excess, and obsolete inventory involved subjective evaluation and high degree of auditor judgement due to significant assumptions involved in estimating future inventory turnover and sales. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. We obtained an understanding and evaluated the design of internal controls that address the risks of material misstatement relating to recording inventory at the lower of cost or net realizable value. We tested the accuracy and completeness of the underlying data used in calculating the allowance, including testing of a sample of inventory usage transactions, and recomputed the allowance calculation. We also evaluated the Company’s ability to accurately estimate the assumptions used to develop the estimate by comparing historical allowance amounts to the history of actual inventory write-offs. Furthermore, we reviewed management’s business plan and forecasts of future sales, including expected changes in technology and product lines. F-1 Table of Contents Assessment of Realizability of Deferred Tax Assets As disclosed in Note 8 of the Company’s consolidated financial statements, the Company records and measures net deferred tax assets based on estimated realizability. Valuation allowances are provided to the extent that it is more likely than not that some portion, or all, of deferred tax assets will not be realized. The Company recorded approximately $4,116,000 in net deferred tax assets after recording a valuation allowance of approximately $4,398,000 as of December 31, 2023. Auditing management’s assessment of the realizability of deferred tax assets involved subjective estimation and high degree of auditor judgment in determining whether sufficient future taxable income, including projected pre-tax income, will be generated to support the realization of the existing deferred tax assets before expiration. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. We obtained an understanding and evaluated the design of internal controls that address the risks of material misstatement relating to the realizability of deferred tax assets, including controls over management’s projections of pre-tax income, and related entity-level controls. We also evaluated the assumptions used by the Company to develop projections of future taxable income, and tested the completeness and accuracy of the underlying data used in the projections, including comparing the projections of pre-tax income with the actual results of prior periods. In addition, we analyzed the nature of items giving rise to deferred tax assets and considered related expiration dates, as applicable. Furthermore, we evaluated management’s business plan and analysis of current economic and industry trends, including the impact of geopolitical tensions, and compared projections of future pre-tax income to other forecasted financial information prepared by management. We have served as the Company’s auditor since 2015. /s/ MSL, P.A. Orlando, Florida March 14, 2024 F-2 Table of Contents BK TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 3,456 $ 1,918 Trade accounts receivable, net 7,902 10,616 Inventories, net 23,952 22,105 Prepaid expenses and other current assets 1,892 1,578 Total current assets 37,202 36,217 Property, plant and equipment, net 5,366 4,884 Operating lease right-of-use (ROU) assets 1,560 1,991 Investments 742 1,481 Deferred tax assets, net 4,116 4,116 Other assets 422 143 Total assets $ 49,408 $ 48,832 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 9,822 $ 12,898 Accrued compensation and related taxes 1,302 1,143 Accrued warranty expense 722 591 Accrued other expenses and other current liabilities 363 700 Short-term operating lease liabilities 525 485 Credit facility 6,476 5,854 Notes payable-current portion 71 277 Deferred revenue 1,137 1,022 Total current liabilities 20,418 22,970 Notes payable, net of current portion — 329 Long-term operating lease liabilities 1,260 1,785 Deferred revenue 6,419 3,613 Total liabilities 28,097 28,697 Commitments and contingencies Stockholders’ equity: Preferred stock; $ 1.00 par value; 1,000,000 authorized shares; none issued or outstanding — — Common stock; $ 0.60 par value; 10,000,000 authorized shares; 3,867,082 and 3,686,939 issued and 3,577,002 and 3,396,859 outstanding shares as of December 31, 2023 and 2022, respectively 2,320 2,212 Additional paid-in capital 48,602 45,304 Accumulated deficit ( 24,209 ) ( 21,979 ) Treasury stock, at cost, 290,080 shares as of December 31, 2023, and 2022, respectively ( 5,402 ) ( 5,402 ) Total stockholders’ equity 21,311 20,135 Total liabilities and stockholders’ equity $ 49,408 $ 48,832 See notes to consolidated financial statements. F-3 Table of Contents BK TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Years Ended December 31, 2023 2022 Sales, net $ 74,094 $ 50,951 Expenses Cost of products 51,858 41,107 Selling, general and administrative 23,013 20,925 Total operating expenses 74,871 62,032 Operating loss ( 777 ) ( 11,081 ) Other (expense) income: Net interest (expense) ( 575 ) ( 144 ) Gain on disposal of property, plant, and equipment — 1 (Loss) on investments ( 740 ) ( 313 ) Other (expense) ( 84 ) ( 96 ) Total other expense ( 1,399 ) ( 552 ) Loss before income taxes ( 2,176 ) ( 11,633 ) Provision for income tax (expense) ( 54 ) — Net loss $ ( 2,230 ) $ ( 11,633 ) Net loss per share-basic and diluted $ ( 0.65 ) $ ( 3.44 ) Weighted average shares outstanding-basic and diluted 3,427 3,382 See notes to consolidated financial statements. F-4 Table of Contents BK TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except share and per share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Treasury Stock Total Balance as December 31, 2021 3,659,800 2,196 44,645 ( 8,821 ) ( 5,402 ) 32,618 Common stock issued-restricted stock units 27,139 16 ( 16 ) — Share-based compensation expense-stock options — — 271 — — 271 Shared-based compensation expense-restricted stock units — — 404 — — 404 Dividends declared ($0.03 per share) — — — ( 1,525 ) — ( 1,525 ) Net loss — — — ( 11,633 ) — ( 11,633 ) Balance at December 31, 2022 3,686,939 2,212 45,304 ( 21,979 ) ( 5,402 ) 20,135 Common stock issued 94,376 59 1,004 — — 1,063 Common stock issued-stock options 345 3 ( 3 ) — — — Common stock issued-restricted stock units 85,422 46 ( 46 ) — — — Share-based compensation expense-stock options — — 200 — — 200 Shared-based compensation expense-restricted stock units — — 1,143 — — 1,143 Common stock warrants issued — — 1,000 — — 1,000 Net loss — — — ( 2,230 ) — ( 2,230 ) Balance at December 31, 2023 3,867,082 $ 2,320 $ 48,602 $ ( 24,209 ) $ ( 5,402 ) $ 21,311 See notes to consolidated financial statements. F-5 Table of Contents BK TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2023 2022 Operating activities Net loss $ ( 2,230 ) $ ( 11,633 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Allowance for credit losses — 170 Inventory allowance 591 81 Amortization of deferred finance and other assets 150 — Deferred tax expense — — Depreciation and amortization 1,635 1,423 Share-based compensation expense -stock options 200 271 Share-based compensation expense-restricted stock units 1,143 404 Unrealized loss on investment 740 313 (Gain) on sale of equipment — ( 1 ) Changes in operating assets and liabilities: Trade accounts receivable 2,714 ( 2,557 ) Inventories ( 2,437 ) ( 5,208 ) Prepaid expenses and other current assets ( 314 ) 56 Other assets ( 279 ) ( 45 ) Operating lease ROU assets and lease liabilities ( 54 ) ( 38 ) Accounts payable ( 3,077 ) 7,015 Accrued compensation and related taxes 159 44 Accrued warranty expense 131 58 Deferred revenue 2,921 884 Accrued other expenses and other current liabilities ( 338 ) ( 237 ) Net cash provided by (used in) operating activities 1,655 ( 9,000 ) Investing activities Purchases of property, plant and equipment ( 2,117 ) ( 1,750 ) Net cash used in investing activities ( 2,117 ) ( 1,750 ) Financing activities Dividends paid — ( 2,029 ) Proceeds from issuance of common stock 1,063 — Proceeds from issuance of common stock warrants 1,000 — Proceeds from credit facility and notes payable 74,908 9,722 Repayment of credit facility and notes payable ( 74,971 ) ( 5,605 ) Net cash provided by financing activities 2,000 2,088 Net change in cash and cash equivalents 1,538 ( 8,662 ) Cash and cash equivalents, beginning of year 1,918 10,580 Cash and cash equivalents, end of year $ 3,456 $ 1,918 Supplemental disclosure Interest paid $ 660 $ 190 Non-cash financing activity Common Stock issued under restricted stock units $ 890 $ 364 Cashless exercise of stock options and related conversion of net shares to stockholders’ equity $ 4 $ — See notes to consolidated financial statements. F-6 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 1. Summary of Significant Accounting Policies Description of Business BK Technologies Corporation (collectively with its subsidiaries, the “Company”) is a holding company. The primary business of its wholly owned operating subsidiary, BK Technologies, Inc., is the designing, manufacturing and marketing of wireless communications equipment primarily consisting of two-way land mobile radios and related products, which are sold in two primary markets: (1) the government and public safety market, and (2) the business and industrial market. The Company has only one reportable business segment. On March 28, 2019, BK Technologies, Inc., the predecessor of BK Technologies Corporation, implemented a holding company reorganization, which resulted in BK Technologies Corporation becoming the direct parent company of, and the successor issuer to, BK Technologies, Inc. For the purpose of this report, references to the “Company” or its 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. Principles of Consolidation The accounts of the Company have been included in the accompanying consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. The Company consolidates entities in which it has a controlling financial interest. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a variable interest entity (“VIE”) or a voting interest entity. VIEs are entities in which (i) the total equity investment at risk is not sufficient to enable the entity to finance its activities independently, or (ii) the at-risk equity holders do not have the normal characteristics of a controlling financial interest. A controlling financial interest in a VIE is present when an enterprise has one or more variable interests that have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The enterprise with a controlling financial interest is the primary beneficiary and consolidates the VIE. Voting interest entities lack one or more of the characteristics of a VIE. The usual condition for a controlling financial interest is ownership of a majority voting interest for a corporation or a majority of kick-out or participating rights for a limited partnership. When the Company does not have a controlling financial interest in an entity but exerts significant influence over the entity’s operating and financial policies (generally defined as owning a voting or economic interest of between 20 % to 50 %), the Company’s investment is accounted for under the equity method of accounting. If the Company does not have a controlling financial interest in, or exert significant influence over, an entity, the Company accounts for its investment at fair value, if the fair value option was elected, or at cost. Through September 30, 2022, the Company was the sole limited partner in FGI 1347 Holdings, LP (“1347 LP”), a consolidated VIE. As disclosed in Note 6, the Company ceased to be the limited partner of 1347 LP as of September 30, 2022. Inventories Inventories are stated at the lower of cost (determined by the average cost method) or net realizable value. Freight costs are classified as a component of the cost of products in the accompanying consolidated statements of operations. The allowance for slow-moving, excess and obsolete inventory is used to state the Company’s inventories at the lower of cost or net realizable value. Because the amount of inventory that will actually be recouped through sales cannot be known with certainty at any particular time, the Company relies on past sales experience, future sales forecasts, and its strategic business plans. Generally, in analyzing inventory levels, inventory is classified as having been used or unused during the past year. The Company then establishes an allowance based upon several factors, including, but not limited to, business forecasts, inventory quantities and historic usage profile. F-7 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 1. Summary of Significant Accounting Policies (Continued) Supplemental to the aforementioned analysis, specific inventory items are reviewed individually by management. Based on the review, considering business levels, future prospects, new products and technology changes, management, using its business judgment, may adjust the valuation of specific inventory items to reflect an accurate valuation estimate. Management also performs a determination of the net realizable value for all finished goods with a selling price below cost. For all such items, the inventory is valued at not more than the selling price less cost, if any, to sell. Property, Plant and Equipment Property, plant and equipment is carried at cost less accumulated depreciation. Expenditures for maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the resulting gain or loss is reflected in operations for the period. Depreciation and amortization are generally computed on the straight-line method using lives of 3 to 10 years for machinery and equipment and 5 to 8 years for leasehold improvements. Impairment of Long-Lived Assets Management regularly reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds their fair value, which considers the discounted future net cash flows. No long-lived assets were considered impaired at December 31, 2023 and 2022. Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Allowance for Credit Losses The Company records an allowance for credit losses based on specifically identified amounts that the Company believes to be uncollectible. The Company records an allowance for credit losses for its financial instruments, which are primarily composed of trade accounts receivable. The measurement and recognition of credit losses involves the use of judgment and represents management’s estimate of expected lifetime credit losses based on historical experience and trends, current conditions, and forecasts. The Company’s assessment of expected credit losses includes consideration of historical credit loss experience, the aging of account balances, customer concentrations, customer credit-worthiness, current and expected economic, market and industry factors affecting the Company’s customers, including their financial condition. The Company evaluates its experience with historical losses and then applies this historical loss ratio to financial assets with similar characteristics. The Company may also establish an allowance for credit losses for specific receivables when it is probable that the receivable will not be collected and the loss can be reasonably estimated. If the Company’s actual collections experience changes, revisions to the allowance may be required. Amounts are written off against the allowance when all attempts to collect a receivable have failed, and reversals of previously reserved amounts are recognized if a specifically reserved item is settled for an amount exceeding the previous estimate. Based on information available, management believes the allowance for credit losses as of December 31, 2023 and 2022 is adequate. F-8 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 1. Summary of Significant Accounting Policies (Continued) Revenue Recognition The Company recognizes revenues in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” and the additional related ASUs (“ASC 606”), which replaced previous revenue guidance and outlines a single set of comprehensive principles for recognizing revenue under accounting principles generally accepted in the United States of America (“GAAP”). These standards provide guidance on recognizing revenue, including a five-step method to determine when revenue recognition is appropriate: Step 1: Identify the contract with the customer; Step 2: Identify the performance obligations in the contract; Step 3: Determine the transaction price; Step 4: Allocate the transaction price to the performance obligations; and Step 5: Recognize revenue as the Company satisfies a performance obligation. ASC 606 provides that sales revenue is recognized when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company generally satisfies performance obligations upon shipment of the product or service to the customer. This is consistent with the time in which the customer obtains control of the product or service. For extended warranties, sales revenue associated with the warranty is deferred at the time of sale and later recognized on a straight-line basis over the extended warranty period. Some contracts include installation services, which are completed in a short period of time and the revenue is recognized when the installation is complete. Customary payment terms are granted to customers, based on credit evaluations. Currently, the Company does not have any contracts where revenue is recognized, but the customer payment is contingent on a future event. The Company periodically reviews its revenue recognition procedures to assure that such procedures are in accordance with GAAP. Surcharges collected on certain sales to government customers and remitted to governmental agencies are not included in revenues or in costs and expenses. Income Taxes The Company accounts for income taxes using the asset and liability method specified by GAAP. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply in the period in which the deferred tax asset or liability is expected to be realized. The effect of changes in net deferred tax assets and liabilities is recognized on the Company’s consolidated balance sheets and consolidated statements of operations in the period in which the change is recognized. Valuation allowances are provided to the extent that impairment of tax assets is more likely than not. In determining whether a tax asset is realizable, the Company considers, among other things, estimates of future earnings based on information currently available, current and anticipated customers, contracts and new product introductions, as well as recent operating results and certain tax planning strategies. If the Company fails to achieve the future results anticipated in the calculation and valuation of net deferred tax assets, the Company may be required to increase the valuation allowance related to its deferred tax assets in the future. Concentration of Credit Risk The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. At December 31, 2023 and 2022, accounts receivable from governmental customers were approximately $ 1,445 and $ 3,772 , respectively. Generally, receivables are due within 30 days. Credit losses relating to customers have been consistently within management’s expectations. F-9 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 1. Summary of Significant Accounting Policies (Continued) The Company primarily maintains cash balances at one financial institution. Accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $ 250 . From time to time, the Company has had cash in financial institutions in excess of federally insured limits. As of December 31, 2023, the Company had cash and cash equivalents in excess of FDIC limits of $ 3,200 . Manufacturing and Raw Materials The Company relies upon a limited number of manufacturers to produce its products and on a limited number of component suppliers. Some of these manufacturers and suppliers are in other countries. Approximately 16.0% of the Company’s material, subassembly and product procurements in 2023 were sourced internationally, of which approximately 94.8% were sourced from twelve suppliers. For 2022, approximately 17.0% of the Company’s material, subassembly and product procurements were sourced internationally, of which approximately 80.6% were sourced from five suppliers . Purchase orders denominated in U.S. dollars are placed with these suppliers from time to time and there are no guaranteed supply arrangements or commitments. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Significant estimates include accounts receivable allowances, inventory obsolescence allowance, warranty allowance, and income tax accruals. Actual results could differ from those estimates. Fair Value of Financial Instruments The Company’s financial instruments consist of cash and cash equivalents, trade accounts receivable, investments, accounts payable, accrued expenses, notes payable, and other liabilities. As of December 31, 2023 and 2022, the carrying amount of cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses, notes payable, and other liabilities approximated their respective fair value due to the short-term nature and maturity of these instruments. Prior to September 14, 2022, the Company held an investment in the common stock of FG Financial Group, Inc. (Nasdaq: FGF) (“FGF”), which investment was held by the Company through 1347 LP. The Company used observable market data assumptions (Level 1 inputs, as defined in accounting guidance) that it believes market participants would use in pricing its investment in FGF. Effective September 14, 2022, the Company made an investment in Series B common membership interests of FG Financial Holdings, LLC (“FG Holdings LLC”). As further discussed in Note 6, the Company records the investment according to guidance provided by ASC 820 “Fair Value Measurement”, as the Company does not have a controlling financial interest in, nor exerts significant influence over the activities of FG Holdings LLC. The investment in Series B common membership interests of FG Holdings LLC is reported using net asset value (“NAV”) of interests held by the Company at period-end. The NAV is calculated using the observable fair value of the underlying stock of FGF held by FG Holdings LLC, plus uninvested cash, less liabilities, further adjusted through allocations based on distribution preferences, as defined in operating agreement of FG Holdings LLC. The NAV is used as a practical expedient and has not been classified within the fair value hierarchy. F-10 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 1. Summary of Significant Accounting Policies (Continued) Liquidity The Company incurred operating losses during 2023 and 2022 and reported negative cash flows from operations during 2022. The Company’s operating results have been negatively impacted by the worldwide shortages of materials, in particular semiconductors and integrated circuits, extended lead times, and increased costs and inventory levels for certain components. On November 22, 2022, the Company’s subsidiaries, BK Technologies, Inc. and RELM Communications, Inc. (the “Subsidiaries”), entered into an Invoice Purchase and Security Agreement (“IPSA”) with Alterna Capital Solutions, LLC (“Alterna”), for a one-year Line of Credit with total maximum funding up to $15 million . The Company used funds obtained from the Line of Credit to replace the existing JPMC Credit Agreement which expired on January 31, 2023 (see Note 5). On November 22, 2023, the IPSA was renewed for one more year. Management believes that cash and cash equivalents currently available, combined with anticipated cash to be generated from operations, and borrowing ability are sufficient to meet the Company’s working capital requirements in the foreseeable future. The Company generally relies on cash from operations, commercial debt, and equity offerings, to the extent available, to satisfy its liquidity needs and to meet its payment obligations The Company may engage in public or private offerings of equity or debt securities to maintain or increase its liquidity and capital resources. However, financial and economic conditions, including those resulting from the current inflationary environment and current geopolitical tension, could impact our ability to raise capital or debt financing, if needed, on acceptable terms or at all. Reverse Stock Split On March 23, 2023, the Board of Directors approved a one (1)-for-five (5) reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the Company’s Common Stock, and on April 4, 2023, the Company filed with the Secretary of State of the State of Nevada a Certificate of Change to its Articles of Incorporation to effect the Reverse Stock Split. The Company executed the Reverse Stock Split, which became effective at 5:00 p.m. Eastern Time on April 21, 2023. Shares of Common Stock underlying outstanding stock options and restricted stock units were proportionately reduced, and the respective exercise prices were proportionately increased in accordance with the terms of the agreements governing such securities. Accordingly, all shares and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect the Reverse Stock Split. Advertising and Promotion Costs The cost for advertising and promotion is expensed as incurred. Advertising and promotion expenses are classified as part of selling, general and administrative (“SG&A”) expenses in the accompanying consolidated statements of operations. For the years ended December 31, 2023 and 2022, such expenses totaled $ 478 and $ 145 , respectively. Engineering, Research and Development Costs Included in SG&A expenses for the years ended December 31, 2023 and 2022 are engineering, research and development costs of $ 9,334 and $ 9,604 , respectively. F-11 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 1. Summary of Significant Accounting Policies (Continued) Share-Based Compensation The Company accounts for share-based arrangements in accordance with GAAP, which requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which the employee is required to provide service in exchange for the award requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Restricted Stock Units The Company recorded non-cash restricted stock unit compensation expense of $ 1,143 and $ 404 for the years ended December 31, 2023 and 2022, respectively. Earnings (Loss) Per Share Earnings (loss) per share amounts are computed and presented for all periods in accordance with ASC 260 “Earnings per Share”. Comprehensive Income (loss) Comprehensive income (loss) was equal to net income (loss) for the years ended December 31, 2023 and 2022. Product Warranty The Company offers two-year and five-year standard warranties to its customers, depending on the specific product and terms of the customer purchase agreement. The Company’s typical warranties require it to repair and replace defective products during the warranty period at no cost to the customer. At the time the product revenue is recognized, the Company records a liability for estimated costs under its warranties. The costs are estimated based on historical experience. The Company periodically assesses the adequacy of its recorded liability for product warranties and adjusts the amount as necessary. Recent Accounting Pronouncements The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial assets, including financial assets arising from revenue transactions, such as accounts receivable. The new expected credit loss methodology, which is based on a combination of historical experience, current conditions and reasonable and supportable forecasts, replaced the incurred loss model for measuring and recognizing expected credit losses. This ASU is effective for the Company for 2023, and management incorporated this guidance into its methodology for estimating its accounts receivable allowances. Based on historical trends, the financial condition of the Company’s customers and management’s expectations of economic and industry factors affecting the Company’s customers, the adoption of ASU 2016-13 did not have a material effect on the Company’s consolidated financial statements. F-12 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 2. Inventories, net Inventories, which are presented net of allowance for slow moving, excess and obsolete inventory, consisted of the following: December 31, 2023 December 31, 2022 Finished goods $ 4,622 $ 2,965 Work in process 8,275 7,313 Raw materials 11,055 11,827 $ 23,952 $ 22,105 Changes in the allowance for slow-moving, excess, and obsolete inventory are as follows: Years Ended December 31, 2023 2022 Balance, beginning of year $ 1,247 $ 1,288 Charged to cost of sales 591 81 Disposal of inventory — ( 122 ) Balance, end of year $ 1,838 $ 1,247 During the year ended December 31, 2022, the Company recorded one-time, non-cash write-offs of new product developmental materials and inventory of $ 900 related to the BKR products, $ 646 was recorded in Selling, general and administrative expenses and $ 254 was recorded as a cost of products. 3. Allowance for Credit Losses Changes in the allowance for doubtful accounts are composed of the following: Years Ended December 31, 2023 2022 Balance, beginning of year $ 50 $ 50 Provision for credit losses — 170 Uncollectible accounts written off — ( 170 ) Balance, end of year $ 50 $ 50 4. Property, Plant and Equipment, net Property, plant and equipment, net include the following: December 31, 2023 2022 Leasehold improvements $ 659 $ 614 Machinery and equipment 17,793 15,721 Gross Property, Plant, and Equipment 18,452 16,335 Less accumulated depreciation and amortization ( 13,086 ) ( 11,451 ) Property, plant and equipment, net $ 5,366 $ 4,884 Depreciation and amortization expense relating to property, plant and equipment for the years ended December 31, 2023 and 2022 was approximately $ 1,635 and $ 1,423 respectively. During the year ended December 31, 2022, the company removed from its records approximately $ 122 of fully depreciated machinery and equipment and none in the year ended December 31, 2023. F-13 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 5. Debt Credit Facilities On November 22, 2022, the Subsidiaries entered into the IPSA with Alterna. On November 28, 2022, the Subsidiaries and Alterna entered into a rider to the IPSA, to modify the IPSA to, among other things, provide a credit facility for up to 75% of net orderly liquidation value of inventory, not to exceed 100% of the eligible accounts receivable balance . The IPSA, which provides for a one-year Line of Credit with a maximum capacity of up to $ 15 million renews, unless canceled by either party, as provided in the agreement. The Line of Credit bears an interest rate of Prime plus 1.85 %. The effective borrowing rate under the IPSA was 10.35 % as of December 31, 2023. Interest and related servicing fees for years ended December 31, 2023 and 2022, were approximately $ 648 and $ 100 , respectively. Under the arrangement, the Company may transfer eligible short-term trade receivables to the conduit, with full recourse, on a daily basis in exchange for cash. Generally, at the transfer date, the Company may receive cash equal to approximately 85 % of the value of the transferred receivables. The Company accounts for the transfers of receivables as a secured borrowing due to the Company’s continuing involvement with the accounts receivable. On November 22, 2023 the IPSA was renewed for one year. On January 13, 2020, the Company’s subsidiary, BK Technologies, Inc., executed Credit Agreement (the “Original Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMC”) and a Line of Credit Note in favor of JPMC in an aggregate principal amount of up to $5,000,000 (the “Original Note”), each dated as of January 13, 2020 . The Original Note had a maturity date of January 31, 2021. On January 26, 2021, BK Technologies, Inc. and JPMC entered into a Note Modification Agreement (the “Modification”), to modify the Original Note to, among other things, extend the maturity date of the Original Note to January 31, 2022. Then, on January 21, 2022, BK Technologies, Inc. and JPMC entered into a First Amendment to Credit Agreement (the “Amendment”) to, among other things, extend the maturity date to January 31, 2023. Also on January 31, 2022, BK Technologies, Inc. delivered to JPMC a related Line of Credit Note (the “Note” and collectively with the Original Credit Agreement, as modified by the Modification and the Amendment, the “Credit Agreement”), in replacement, renewal and extension of the Original Note, as previously modified, which had a maturity date of January 31, 2023. The outstanding balance of $ 4.5 million was paid off in November 2022 with funds received from the IPSA funding. During 2023 and 2022, the Company transferred receivables having an aggregate face value of $ 67.4 and $ 12.2 million, respectively, to the conduit and received proceeds of $ 74.6 and $ 10.4 million, respectively, which also includes draws on available inventory funding. There were no losses incurred on these transfers during 2023 and 2022, respectively. As of December 31, 2023, the outstanding borrowings under the IPSA were approximately $ 6.5 million and the outstanding principal amount of receivables transferred under the IPSA amounted to $ 6.2 million. Notes Payable On April 6, 2021, BK Technologies, Inc., a wholly owned subsidiary of the Company, and JPMC, as a lender, entered into a Master Loan Agreement in the amount of $ 743 to finance various items of manufacturing equipment (the “JPMC Credit Agreement”). The Company used funds obtained from the Line of Credit to replace the JPMC Credit Agreement. This note payable was paid in full on June 27, 2023. On September 25, 2019, BK Technologies, Inc., a wholly owned subsidiary of BK Technologies Corporation, and U.S. Bank Equipment Finance, a division of U.S. Bank National Association, as a lender, entered into a Master Loan Agreement in the amount of $ 425 to finance various items of equipment. The loan is collateralized by the equipment purchased using the proceeds. The Master Loan Agreement is payable in 60 monthly principal and interest payments of approximately $ 8 beginning on October 25, 2019 and maturing on September 25, 2024 , and bears a fixed interest rate of 5.11 %. F-14 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) The following table summarizes the notes payable principal repayments subsequent to December 31, 2023: December 31, 2023 2024 $ 71 Thereafter — Total payments $ 71 6. Investments The Company held an investment in a limited partnership, FGI 1347 Holdings, LP (“1347 LP”), of which the Company was the sole limited partner. 1347 LP was established for the purpose of investing in securities, and its sole primary asset was shares of FG Financial Group, Inc. (Nasdaq: FGF) (“FGF”). These shares were purchased in March and May 2018 for approximately $ 3,741 . Affiliates of Fundamental Global GP, LLC (“FG”), a significant stockholder of the Company, served as the general partner and the investment manager of 1347 LP, and the Company was the sole limited partner. As the sole limited partner, the Company was entitled to 100% of net assets held by 1347 LP. FG has not received any management fees or performance fees or expense reimbursement for its services to the limited partnership arising in connection with 1347 LP’s operations, as provided by the partnership agreement, upon approval by the Company’s Board of Directors. The Company accounted for the investment in FGF, made through 1347 LP, as a consolidated VIE. VIEs are entities in which (i) the total equity investment at risk is not sufficient to enable the entity to finance its activities independently, or (ii) the at-risk equity holders do not have the normal characteristics of a controlling financial interest. A controlling financial interest in a VIE is present when an enterprise has one or more variable interests that have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The enterprise with a controlling financial interest is the primary beneficiary and consolidates the VIE. On September 14, 2022, FG contributed all of the shares of FGF held by 1347 LP to FG Holdings, LLC with an approximate value of $ 945 , based on the published price of FGF stock, in exchange for Series B Common Interests of FG Holdings LLC, with an equivalent value. The Company recognized a loss of $ 850 in September 30, 2022 as a result.. The investment in the Series B common membership interests of FG Holdings LLC is measured using the NAV practical expedient in accordance with ASC 820 Fair Value Measurement and has not been classified within the fair value hierarchy. FG Holdings LLC invests in the common and preferred stock of FGF. FG Holdings LLC’s structure provides for Series A preferred interests, which (i) accrue a return of eight percent per annum on the unreturned capital contributions by Series A holders, (ii) have preference in the order of distributions of contributed capital, and (iii) are entitled to receive an additional distribution equal to 20 % of any positive profits / gains in excess of the eight percent above with respect to the capital provided by the holders of Series A preferred membership interests. The Series B common membership interests follow Series A in the order of distributions and are entitled to receive (i) cumulative distributions equal to the aggregate capital contributions by the Series B common membership holders, (ii) a pro rata share of the total return / gain based on capital contributed by the Series B common membership interests, and (iii) an additional return equal to 1.5 times the Series A of positive profits / gains described above, distributed in proportion to the percentage of Series B common interests owned by the Series B holder. There is no defined redemption frequency, and the Company cannot redeem or transfer its investment without the prior written consent of FG Holdings LLC' managers, who are FG affiliates. Distributions may be made to members at such times and amounts as determined by the managers, and shall be based on the most recent NAV. The Company does not have any unfunded commitments related to this investment. F-15 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) On September 30, 2022, Series B Common Interests of FG Holdings LLC were distributed in-kind to the Company as the sole limited partner of 1347 LP, and the Company consented to withdraw from 1347 LP, as the limited partner. As a result, the Company recognized a loss on deconsolidation of 1347 LP of approximately $ 43 . As of December 31, 2023, the members and affiliates of FG Holdings LLC beneficially owned in the aggregate 5,666,111 shares of FGF’s common stock, representing approximately 55 % of FGF’s outstanding shares. Additionally, FG and its affiliates constitute the largest stockholder of the Company. Mr. Kyle Cerminara, who served as a director of the Company and chairman of the Board of Directors until December 14, 2023, is Chief Executive Officer, Co-Founder and Partner of FG and serves as chairman of the board of directors of FG Group Holdings Inc., the entity that is the majority Series B member in FG Holdings LLC. Mr. Cerminara also serves as a manager of FG Holdings LLC and chairman of the board of directors of FGF. During the years ended December 31, 2023 and 2022, the Company recognized a loss of approximately $ 740 and $ 313 , respectively, due to changes in the unrealized loss on investments. On January 25, 2024, the Company redeemed its Series B common membership interests (the “Interests”) of FG Holdings LLC and withdrew from FG Holdings LLC. In exchange for its Interests, the Company received 52,000 shares of the Company’s Common Stock, with an approximate fair value of $ 651 on the date of the transaction and recorded a realized loss of $ 91 on the investment during the first quarter of 2024. 7. Leases The Company accounts for its leasing arrangements in accordance with Topic 842, “Leases”. The Company leases manufacturing and office facilities and equipment under operating leases and determines if an arrangement is a lease at inception. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of its leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company has lease agreements with lease and non-lease components, which are accounted for separately. The Company leases approximately 54,000 square feet (not in thousands) of industrial space in West Melbourne, Florida, under a non-cancellable operating lease. The lease has the expiration date of June 30, 2027 . Rental, maintenance and tax expenses for this facility were approximately $ 596 and $ 688 in 2023 and 2022, respectively. In February 2020, the Company entered into a lease for 6,857 square feet (not in thousands) of office space at Sawgrass Technology Park, 1619 NW 136th Avenue in Sunrise, Florida, for a period of 64 months commencing July 1, 2020. Annual rental, maintenance and tax expenses for the facility were approximately $ 212 and $ 203 in 2023 and 2022, respectively. F-16 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 7. Leases (Continued) Lease costs consist of the following: December 31, 2023 2022 Operating lease cost $ 542 $ 544 Variable lease cost 132 132 Total lease cost $ 674 $ 676 Supplemental cash flow information related to leases was as follows: December 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows (fixed payments) $ 595 $ 583 Operating cash flows (liability reduction) 485 447 Other information related to operating leases was as follows: December 31, 2023 Weighted average remaining lease term (in years) 3.26 Weighted average discount rate 5.50 % Maturity of operating lease liabilities as of December 31, 2023 were as follows: Year ending December 31, 2024 $ 608 2025 618 2026 479 2027 243 Thereafter — Total payments 1,948 Less: imputed interest ( 163 ) Total liability $ 1,785 8. Income Taxes The income tax expense (benefit) is summarized as follows: Years Ended December 31, 2023 2022 Current: Federal $ 25 $ 0 State 29 0 54 0 Deferred: Federal 0 0 State 0 0 0 0 $ 54 $ 0 A reconciliation of the statutory U.S. income tax rate to the effective income tax rate follows: Years Ended December 31, 2023 2022 Statutory U.S. income tax rate ( 21.00 )% ( 21.00 )% State taxes, net of federal benefit 1.34 % 0.00 % Permanent differences 0.87 % 0.12 % Change in valuation allowance 48.01 % 23.6 % Change in tax credits and state NOLs ( 16.59 )% ( 3.38 )% Impact from accounting method change and expired options ( 10.14 )% 0.66 % Effective income tax rate 2.49 % 0.00 % F-17 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 8. Income Taxes (Continued) The components of the deferred income tax assets (liabilities) are as follows: Years Ended December 31, 2023 2022 Deferred tax assets: Operating loss carryforwards $ 1,857 $ 2,989 R&D Tax Credits 2,779 2,625 Section 263A costs 56 50 Amortization 1,029 15 Interest 34 0 Net ROU asset and lease liability 53 63 Unrealized loss 628 508 Asset reserves: Bad debts 12 11 Inventory allowance 430 280 Accrued expenses: Non-qualified stock options 343 159 Compensation 107 86 Deferred warranty revenue 1,934 1,174 Deferred tax assets 9,262 7,960 Less valuation allowance ( 4,398 ) ( 3,356 ) Total deferred tax assets 4,864 4,604 Deferred tax liabilities: Depreciation ( 748 ) ( 488 ) Total deferred tax liabilities ( 748 ) ( 488 ) Net deferred tax assets $ 4,116 $ 4,116 As of December 31, 2023, the Company had a net deferred tax asset of approximately $ 4,864 (net of valuation allowance) offset by deferred tax liabilities of $ 748 derived from accelerated tax depreciation. This asset is primarily composed of net operating loss carryforwards (“NOLs”), research and development tax credits, and deferred revenue, net of a valuation allowance of approximately $ 4,398 . The NOLs total approximately $ 8,030 for federal and $ 6,120 for state purposes, with expirations starting in 2022 for state purposes. State NOLs of $ 1,870 expired in 2022. During 2022, the Company generated $ 9,261 of federal NOLs and during 2023, the Company utilized $ 4,911 of federal NOLs. The deferred tax asset amounts are based upon management’s conclusions regarding, among other considerations, the Company’s current and anticipated customer base, contracts, and product introductions, certain tax planning strategies, and management’s estimates of future earnings based on information currently available, as well as recent operating results during 2023, 2023, and 2021. GAAP requires that all positive and negative evidence be analyzed to determine if, based on the weight of available evidence, the Company is more likely than not to realize the benefit of the deferred tax asset. F-18 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 8. Income Taxes (Continued) Management’s analysis of all available evidence, both positive and negative, provides support that the Company does not have the ability to generate sufficient taxable income in the necessary period to utilize the entire benefit for the deferred tax asset. Accordingly, as of December 31, 2023, a valuation allowance has been established totaling approximately $4,398. Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s net deferred tax asset may be necessary. If future losses are incurred, it may be necessary to record an additional valuation allowance related to the Company’s net deferred tax asset recorded as of December 31, 2023. It cannot presently be estimated what, if any, changes to the valuation of the Company’s deferred tax asset may be deemed appropriate in the future. The 2023 federal and state NOLs and tax credit carryforwards could be subject to limitation if, within any three-year period prior to the expiration of the applicable carryforward period, there is a greater than 50% change in ownership of the Company by any stockholder with 5% or greater ownership. The Company performed a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by GAAP. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, on January 1, 2024, the Company is not aware of any uncertain tax positions that would require additional liabilities or which such classification would be required. The amount of unrecognized tax positions did not change as of December 31, 2023, and the Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months. Penalties and tax-related interest expense, of which there were no material amounts for the years ended December 31, 2023, and 2022, are reported as a component of income tax expense (benefit). The Company files federal income tax returns, as well as multiple state and local jurisdiction tax returns. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution on any particular uncertain tax position, the Company believes that its allowances for income taxes reflect the most probable outcome. The Company adjusts these allowances, as well as the related interest, in light of changing facts and circumstances. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. The calendar years 2020, 2021, and 2022 are still open to IRS examination under the statute of limitations. The last IRS examination on the Company’s 2007 calendar year was closed with no change. F-19 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 9. Income (Loss) Per Share The following table sets forth the computation of basic and diluted loss per share: Years Ended December 31, 2023 2022 Numerator: Net loss from continuing operations numerator for basic and diluted earnings per share $ ( 2,230 ) $ ( 11,633 ) Denominator: Denominator for basic loss per share weighted average shares 3,426,622 3,382,183 Effect of dilutive securities: Denominator for diluted loss per share weighted average shares 3,426,622 3,382,183 Basic and diluted loss per share $ ( 0.65 ) $ ( 3.44 ) Approximately 202,600 stock options and 19,587 restricted stock units for the year ended December 31, 2023 and 200,300 stock options and 41,129 restricted stock units for the year ended December 31, 2022, were excluded from the calculation because they were anti-dilutive. 10. Share-Based Compensation Stock Options The Company has an employee and non-employee director incentive compensation equity plan. Related to these programs, the Company recorded $ 200 and $ 271 of share-based employee compensation expense during the years ended December 31, 2023 and 2022, respectively, which is included as a component of cost of products and SG&A expenses in the accompanying consolidated statements of operations. No amount of share-based employee compensation expense was capitalized as part of capital expenditures or inventory for the years presented. The Company uses the Black-Scholes-Merton option valuation model to calculate the fair value of a stock option grant. The share-based employee compensation expense recorded in the years ended December 31, 2023 and 2022 was calculated using the assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company’s common stock over the period of time, commensurate with the expected life of the stock options. The dividend yield assumption is based on the Company’s expectations of dividend payouts at the grant date. In 2022, the Company paid dividends on January 10, for a dividend declared in 2021, May 16, August 8 and November 8. The Company has estimated its future stock option exercises. The expected term of option grants is based upon the observed and expected time to the date of post vesting exercises and forfeitures of options by the Company’s employees. The risk-free interest rate is derived from the average U.S. Treasury rate for the period, which approximates the rate at the time of the stock option grant. FY 2023 FY 2022 Expected Volatility 55.8 % 55.3 % Expected Dividends 0 % 5.0 % Expected Term (in years) 6.5 6.5 Risk-Free Rate 3.67 % 2.38 % Estimated Forfeitures 0.0 % 0.0 % F-20 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 10. Share-Based Compensation (Continued) A summary of stock option activity under the Company’s equity compensation plans as of December 31, 2023, and changes during the year ended December 31, 2023, are presented below: Stock Options Wgt. Avg. Exercise Price ($) Per Share Wgt. Avg. Remaining Contractual Life (Years) Wgt Avg. Grant Date Fair Value ($) Per Share Aggregate Intrinsic Value ($) As of January 1, 2023 Outstanding 200,300 15.48 7.87 5.64 460,925 Vested 86,846 17.83 6.73 6.57 101,090 Nonvested 113,454 13.68 8.74 4.93 359,835 Period activity Issued 43,600 12.89 — 7.44 — Exercised 4,000 11.65 — 3.79 — Forfeited 35,300 17.08 — 6.27 — Expired 2,000 11.15 — 7.02 — As of December 31, 2023 Outstanding 202,600 14.76 7.60 5.94 37,773 Vested 105,313 16.01 6.80 5.78 9,661 Nonvested 97,287 13.41 8.47 6.12 28,112 Outstanding: Range of Exercise Prices ($) Per Share Stock Options Outstanding Wgt. Avg. Exercise Price ($) Per Share Wgt. Avg. Remaining Contractual Life (Years) 11.51 15.53 149,800 13.19 8.44 16.20 25.50 52,800 19.23 5.24 202,600 14.76 7.60 Exercisable: Range of Exercise Prices ($) Per Share Stock Options Exercisable Wgt. Avg. Exercise Price ($) Per Share 11.51 15.53 63,873 13.51 16.20 25.50 41,440 19.85 105,313 16.01 The weighted-average grant-date fair value per option granted during the years ended December 31, 2023 and 2022 was $ 5.94 and $ 5.64 , respectively. There were 4,000 and no stock options exercised during the years ended December 31, 2023 and 2022, respectively. Restricted Stock Units In connection with the restricted stock units granted to non-employee directors, the Company accrues compensation expense based on the estimated number of shares expected to be issued, utilizing the most current information available to the Company at the date of the consolidated financial statements. The Company estimates the fair value of the restricted stock unit awards based upon the market price of the underlying common stock on the date of grant. F-21 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 10. Share-Based Compensation (Continued) A summary of non-vested restricted stock under the Company’s non-employee director share-based incentive compensation plan is as follows: Year ended December 31, 2023 Number of Shares Weighted Average Grant Date Price per Share Unvested as of January 1, 2023 41,129 $ 13.20 Granted 45,412 12.37 Vested and issued ( 66,954 ) 12.63 Cancelled/forfeited - - Unvested as of December 31, 2023 19,587 $ 13.22 Year ended December 31, 2022 Number of Shares Weighted Average Price per Share Unvested at January 1, 2022 27,411 $ 16.65 Granted 40,857 $ 11.95 Vested and issued ( 27,139 ) $ 14.80 Cancelled/forfeited - - Unvested at December 31, 2022 41,129 $ 13.20 During the years ended December 31, 2023 and 2022, the Company also issued 7,040 and 7,680 RSU’s, respectively, under a consulting agreement for advisory services to the Board of Directors. The principal of the consulting firm was elected as the Chairman of the Board of Directors in December 2023. During 2023, the Company’s Board of Directors approved the Executive Salary Swap Plan to prospectively swap a portion of certain executive’s salaries for a 12 month period (10% minimum, up to 50%) otherwise payable in cash for a grant of RSUs (with each RSU representing a contingent right to receive one share of the Company’s Common Stock) at a fixed rate of $10 per share, rounded down to the nearest whole RSU . The Restricted Stock Units vest at the date of the grant. The Company issued 6,739 under this arrangement through December 31 , 2023. As of December 31, 2023 and 2022, there was approximately $ 299 and $ 1,058 , respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements, including stock options and restricted stock units. This compensation cost is expected to be recognized approximately over one to four years. 11. Other Equity Transactions On November 6, 2023, the Company entered into a Master Supply Agreement (the “MSA”) and Transition Services Agreement (the “TSA,” and together with the MSA, the “Agreements”) with East West Manufacturing, LLC, a Georgia limited liability company (“East West”). Pursuant to the Agreements, the Company will transition its West Melbourne, Florida manufacturing activities to East West’s facilities, and East West will become the exclusive third-party manufacturer of the Company’s radio product line under a three-year arrangement. In connection with the Agreements, the Company and East West entered into a Stock Purchase Agreement (the “SPA”), pursuant to which East West purchased 77,520 shares of the Company’s common stock (the “BKTI Stock”) for an investment of $ 1,000,000 . The number of shares of BKTI Stock was determined based upon a price per share of $ 12.90 , which is equal to the average of the closing price of BKTI Stock on the NYSE American exchange for the 30 most recent trading days prior to November 6, 2023, rounded up to the nearest whole number of shares. Additionally, East West purchased a warrant (“Warrant”), with a five-year term to purchase up to 135,300 shares of the Company’s common stock at an exercise price per share of $ 15.00 . The consideration for the Warrant is payment equal to (a) One Million Dollars ($ 1,000,000 ) minus (b) (i) the amount of any outstanding accounts payable by Company to East West and (ii) the amount of any excess or obsolete inventory of Company currently held by East West (solely to the extent not otherwise taken into account pursuant to the MSA or any other agreement between the Company and East West). The payment included a $950 reduction in accounts payable and $50 in cash. The BKTI Stock, the Warrant and the shares issuable upon exercise of the Warrant are deemed to be issued to an accredited investor in a private placement exempt from the registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (“Securities Act”). The Company’s reliance upon Section 4(a)(2) of the Securities Act is based in part upon the following factors: (a) the issuance of the securities was in connection with isolated private transactions which did not involve any public offering; (b) there were a limited number of offerees; (c) there will be no subsequent or contemporaneous public offerings of the Warrant or the shares underlying the Warrant by the Company; and (d) the negotiations for the sale of the securities took place directly between East West and the Company. F-22 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) 11. Other Equity Transactions (Continued) The warrant issued to EastWest Manufacturing LLC was classified as a component of permanent equity in the Company's Consolidated Balance Sheets as it is a freestanding financial instrument that is immediately exercisable, does not embody an obligation for the Company to repurchase its own shares and permits the holders to receive a fixed number of shares of common stock upon exercise. All of the shares underlying the warrants have not been included in the weighted-average number of shares of common stock used to calculate net loss per share, basic and diluted, attributable to common stockholders because the shares would be anti-dilutive. The Company used the Black-Scholes-Merton option valuation model to calculate the fair value of a stock warrant grant, using the assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company’s common stock over the period of time, commensurate with the expected life of the stock warrant. The dividend yield assumption is based on the Company’s expectations of no dividend payouts at the grant date. The stock price was the closing price of the common stock on the date of the warrant agreement and the strike price and the expected term was defined in the warrant agreement. The risk-free interest rate is derived from the 90 day U.S. Treasury rate at the date of the stock warrant grant. FY 2023 Expected Volatility 66.8 % Expected Dividends 0 % Stock price $ 12.70 Strike price $ 15.00 Expected Term (in years) 5.0 Risk-Free Rate 5.50 % 12. Significant Customers Sales to the U.S. Government represented approximately 49 % and 38 % of the Company’s total sales for the years ended December 31, 2023 and 2022 respectively. These sales were primarily to the various government agencies, including those within the United States Department of Defense, the United States Forest Service, the United States Department of Interior, and the United States Department of Homeland Security. 13. Retirement Plan The Company sponsors a participant contributory retirement 401(k) plan, which is available to all employees. The Company’s contribution to the plan is either a percentage of the participant’s contribution (50% of the participant’s contribution up to a maximum of 6%) or a discretionary amount. For the years ended December 31, 2023 and 2022, total contributions made by the Company were $ 220 and $ 196 , respectively. 14. Commitments and Contingencies Royalty Commitment In 2003, the Company entered into a technology license related to its development of digital products. Under this agreement, the Company is obligated to pay a royalty for each product sold that utilizes the technology covered by this agreement. The Company paid $ 234 and $ 120 for the years ended December 31, 2023 and 2022, respectively. The agreement has an indefinite term, and can be terminated by either party under certain conditions. In 2022, the Company entered into a technology license related to its development of multi-band products. Under this agreement, the Company is obligated to pay a royalty for each product sold that utilizes the technology covered by this agreement, which started in June 2023. The Company paid $0.03 in 2023 . The agreement is for three years and can be automatically renewed for one year at the end of its initial term unless either party provides at least 120 days’ prior written notice of its election not to extend the initial term. Thereafter, either party can terminate the agreement by providing a written notice of non-renewal of at least 60 days’ prior to the end of the then current term. Purchase Commitments The Company has purchase commitments for inventory totaling $ 12,115 as of December 31, 2023. F-23 Table of Contents BK TECHNOLOGIES CORPORATION YEARS ENDED DECEMBER 31, 2023 AND 2022 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data and percentages) Self-Insured Health Benefits The Company maintains a self-insured health benefit plan for its employees. This plan is administered by a third party. As of December 31, 2023, the plan had a stop-loss provision insuring losses beyond $ 90 per employee per year and an aggregate stop-loss of $ 1,677 . As of December 31, 2023 and 2022, the Company recorded an accrual for estimated claims in the amount of approximately $ 275 and $ 240 , respectively, in accrued other expenses and other current liabilities on the Company’s consolidated balance sheets. This amount represents the Company’s estimate of incurred but not reported claims as of December 31, 2023 and 2022. Liability for Product Warranties Changes in the Company’s liability for its standard two-year and five-year product warranties during the years ended December 31, 2023 and 2022 are as follows: Balance at Beginning of Year Warranties Issued Warranties Settled Balance at End of Year 2023 $ 591 $ 165 $ ( 34 ) $ 722 2022 $ 533 $ 558 $ ( 500 ) $ 591 Legal Proceedings From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of its business. There were no pending material claims or legal matters as of December 31, 2023. Geopolitical Tensions and COVID-19 U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the military conflict between Russia and Ukraine and Israel and Palestinian state. Although the length and impact of the ongoing military conflicts is highly unpredictable, the conflict in both of these regions could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. While the impacts of COVID-19 are reflected in our results of operations for 2023 and 2022 respectively, we cannot separate the direct COVID-19 impacts from other factors that cause our performance to vary from quarter to quarter. The ultimate duration and impact of the COVID-19 pandemic on our supply chain and geopolitical factors to our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration and severity of the geopolitical factors on the global economy, which are uncertain and cannot be predicted at this time. 15. Capital Programs On December 17, 2021 a share repurchase program was authorized under which the Company may repurchase up to an aggregate of $ 5 million of its common shares. Share repurchases under this program were authorized to begin immediately. The program does not have an expiration date. Any repurchases would be funded using cash on hand and cash from operations. The actual timing, manner and number of shares repurchased under the program will be determined by management and the Board of Directors at their discretion, and will depend on several factors, including the market price of the Company’s common shares, general market and economic conditions, alternative investment opportunities, and other business considerations in accordance with applicable securities laws and exchange rules. The authorization of the share repurchase program does not require the Company to acquire any particular number of shares and repurchases may be suspended or terminated at any time at the Company’s discretion. As of December 31, 2023, the Company has completed no share repurchases under this program. Pursuant to the Company’s capital return program, during 2021, the Company’s Board of Directors declared a quarterly dividend on the Company’s common stock of $ 0.03 per share on December 17. The dividend was payable to stockholders of record as of January 10, 2022. The dividend was paid on January 24, 2022. Pursuant to the Company’s capital return program, during 2022, the Company’s Board of Directors declared quarterly dividends on the Company’s common stock of $ 0.03 per share on April 7, June 30, and September 29. The dividends were payable to stockholders of record as of May 2, 2022, July 25, 2022, and October 25, 2022, respectively. These dividends were paid on May 16, 2022, August 8, 2022 and November 8, 2022. The Company announced the suspension of its quarterly cash dividend program in March 2023. 16. Subsequent events On January 25, 2024, the Company redeemed its Series B common membership interests (the “Interests”) of FG Holdings LLC and withdrew from FG Holdings LLC. In exchange for its Interests, the Company received 52,000 shares of the Company’s Common Stock, with an approximate fair value of $ 650 on the date of the transaction and recorded a realized loss of $ 91 on the investment during the first quarter of 2024. The shares received by the Company will be held as treasury stock, increasing the total number of treasury shares held by the Company to 342,080 . F-24 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.