On September 6, 2019, the Company granted to each non-employee director restricted stock units with a grant-date fair value of $40 per award (resulting in total aggregate grant-date fair value of $280), which will vest in five equal, annual installments beginning with the first anniversary of the grant date, subject to the director’s continued service through such date, provided that, if the director makes himself available and consents to be nominated by the Company for continued service as a director, but is not nominated for the Board for election by shareholders,stockholders, other than for good reason, as determined by the Board in its discretion, then the restricted stock units shall vest in full as of the director’s last date of service as a director of the Company. On April 24, 2020, upon the resignation of former director Ryan Turner, the Company accelerated the vesting of Mr. Turner’s unvested restricted stock units granted September 6, 2019 and issued 10,389 shares of common stock.
On June 4, 2018, the Company granted to each non-employee director restricted stock units with a grant fair value of $20 per award (resulting in total aggregate grant-date fair value of $140), which vested on June 4, 2019.
Borrowings under the Credit Agreement will bear interest at a rate per annum equal to one-month LIBOR (oror zero if the LIBOR is less than zero) plus a margin of 1.90% (2.011% as of March 31, 2021). The line of credit, as modified, is to be repaid in monthly payments of interest only, payable in arrears, commencing on February 1, 2020, with all outstanding principal and interest to be payable in full at maturity.maturity (January 31, 2022).
The Credit Agreement contains certain customary restrictive covenants, including restrictions on liens, indebtedness, loans and guarantees, acquisitions and mergers, sales of assets, and stock repurchases by BK Technologies, Inc. The Credit Agreement contains one financial covenant requiring BK Technologies, Inc., to maintain a tangible net worth of at least $20,000 at any fiscal quarter end.
The Credit Agreement provides for customary events of default, including: (1) failure to pay principal, interest or fees under the Credit Agreement when due and payable; (2) failure to comply with other covenants and agreements contained in the Credit Agreement and the other documents executed in connection therewith; (3) the making of false or inaccurate representations and warranties; (4) defaults under other agreements with JPMC or under other debt or other obligations of BK Technologies, Inc.; (5) money judgments and material adverse changes; (6) a change in control or ceasing to operate business in the ordinary course; and (7) certain events of bankruptcy or insolvency. Upon the occurrence of an event of default, JPMC may declare the entire unpaid balance immediately due and payable and/or exercise any and all remedial and other rights under the Credit Agreement.
BK Technologies, Inc. was in compliance with all covenants under the Credit Agreement as of June 30, 2020March 31, 2021, and the date of filing this report. As of June 30, 2020March 31, 2021, and the date of filing this report, there were no borrowingsthe Company had an outstanding balance of $800 and $470, respectively and a net balance availability of $3,387 and $2,644 respectively under the Credit Agreement.
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 JuneSeptember 30, 2027. Annual rental, maintenance and tax expenses for the facility are approximately $491.
Maturity of lease liabilities as of June 30, 2020 were as follows:
| | |
| Remaining six months of 2020 | $281 |
| 2021 | 560 |
| 2022 | 447 |
| 2023 | 456 |
| 2024 | 464 |
| Thereafter | 1,193 |
| Total payments | 3,401 |
| 558 |
| Total liability | $2,843 |
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 will be approximately $196 for the first year, increasing by approximately 3% for each subsequent twelve-month12-month period. The Company recorded the ROU asset and related lease liability for this lease upon its commencement.
In March 2021, the Company executed an agreement for the termination of its lease for 8,100 square feet (not in thousands) of office space in Lawrence, Kansas, effective March 31, 2021. The original term of the lease was through December 31, 2021.
Lease costs consisted of the following:
| | |
| | | |
| Operating lease cost | $166 | $143 |
| Short-term lease cost | — | 2 |
| Variable lease cost | 32 | 32 |
| Total lease cost | $198 | $177 |
Supplemental cash flow information related to leases was as follows:
| | |
| | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows (fixed payments) | $211 | $122 |
| Operating cash flows (liability reduction) | 171 | 82 |
| | | |
| ROU assets obtained in exchange for lease obligations: | | |
| Operating leases | 14 | 9 |
Other information related to operating leases was as follows:
| |
| Weighted average remaining lease term (in years) | 5.93 |
| Weighted average discount rate | 5.50% |
Maturity of lease liabilities as of March 31, 2021, were as follows:
| | |
| Remaining nine months of 2021 | $428 |
| 2022 | 582 |
| 2023 | 594 |
| 2024 | 607 |
| 2025 | 618 |
| Thereafter | 722 |
| Total payments | 3,551 |
| Less: imputed interest | (526) |
| Total liability | $3,025 |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE CONCERNING
FORWARD-LOOKING STATEMENTS
We believe that it is important to communicate our future expectations to our security holders and to the public. This report, therefore, contains statements about future events and expectations which are “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including the statements about our plans, objectives, expectations, and prospects. You can expect to identify these statements by forward-looking words such as “may,” “might,” “could,” “would,” “should,” “will,” “anticipate,” “believe,” “plan,” “estimate,” “project,” “expect,” “intend,” “seek,” “are encouraged” and other similar expressions. Any statement contained in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved.
Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 20192020, and in our subsequent filings with the Securities and Exchange Commission, and include, among others, the following:
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changes or advances in technology;
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the success of our land mobile radio product line;
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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;
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competition in the land mobile radio industry;
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general economic and business conditions, including federal, state and local government budget deficits and spending limitations, any impact from a prolonged shutdown of the U.S. Government, and the ongoing effects of the COVID-19 pandemic;
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the availability, terms and deployment of capital;
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reliance on contract manufacturers and suppliers;
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risks associated with fixed-price contracts;
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heavy reliance on sales to agencies of the U.S. Government and our ability to comply with the requirements of contracts, laws and regulations related to such sales;
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allocations by government agencies among multiple approved suppliers under existing agreements;
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our ability to comply with U.S. tax laws and utilize deferred tax assets;
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our ability to attract and retain executive officers, skilled workers and key personnel;
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our ability to manage our growth;
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our ability to identify potential candidates for, and consummate acquisition, disposition or investment transactions, and risks incumbent to being a noncontrolling interest stockholder in a corporation;
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the impact of business conditions, including the COVID-19 pandemic, on the companies in which we hold investments;
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impact of our capital allocation strategy;
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risks related to maintaining our brand and reputation;
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impact of government regulation;
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rising health care costs;
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our business with manufacturers located in other countries, including changes in the U.S. Government and foreign governments’ trade and tariff policies, as well as any further impact resulting from the COVID-19 pandemic;
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our inventory and debt levels;
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protection of our intellectual property rights;
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fluctuation in our operating results and stock price;
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acts of war or terrorism, natural disasters and other catastrophic events, such as the COVID-19 pandemic;
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any infringement claims;
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data security breaches, cyber-attacks and other factors impacting our technology systems;
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availability of adequate insurance coverage;
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maintenance of our NYSE American listing;
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risks related to being a holding company; and
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the effect on our stock price and ability to raise equity capital ofthrough future sales of shares of our common stock.
stock.
Some of these factors and risks have been, and may further be, exacerbated by the COVID-19 pandemic. We assume no obligation to publicly update or revise any forward-looking statements made in this report, whether as a result of new information, future events, changes in assumptions or otherwise, after the date of this report. Readers are cautioned not to place undue reliance on these forward-looking statements.
Reported dollar amounts in the management’s discussion and analysis (“MD&A”) section of this report are disclosed in millions or as whole dollar amounts.
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report and the MD&A, consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020, filed with the SEC on March 3, 2021.
Executive Overview
BK Technologies Corporation is a holding company, with a wholly-ownedwholly owned operating subsidiary, BK Technologies, Inc. We design, manufacture and market two-way land mobile radios, repeaters, base stations and related components and subsystems.
Two-way land mobile radios can be hand-held (portable) or installed in vehicles (mobile). Repeaters expand the range of two-way land mobile radios, enabling them to operate over a wider area. Base station components and subsystems are installed at radio transmitter sites to improve performance by enhancing the signal and reducing or eliminating signal interference and enabling the use of one antenna for both transmission and reception. We incorporate both analog and digital technologies in our products. Our digital technology is compliant with the Project 25 standard of the Association of Public-Safety Communications Officials. We offer products primarily under twothe “BK” brand names: BK Radio and RELM.name. Generally, BK Radio-brandedBK-branded products serve the government and public safety market, while RELM-branded products serve the business and industrial market.
Holding Company Reorganization
On March 28, 2019, we implemented a holding company reorganization. The reorganization created a new holding company, BK Technologies Corporation, which became the new parent company of BK Technologies, Inc. The holding company reorganization was intended to create a more efficient corporate structure and increase operational flexibility. We did not incur any material operational or financial impacts. The holding company reorganization was effectedaffected through a merger transaction that was a tax-free transaction for U.S. federal income tax purposes for our stockholders. No stockholder vote was required to effect the merger transaction.
As part of the holding company reorganization, stockholders of our predecessor, BK Technologies, Inc., became stockholders of BK Technologies Corporation, on a one-for-one basis, with the same number of shares and same ownership percentage of common stock that they held immediately prior to the holding company reorganization. Following the reorganization, BK Technologies Corporation replaced BK Technologies, Inc. as the publicly traded entity, and shares of BK Technologies Corporation were listed on the NYSE American under the symbol “BKTI,” which is the same symbol as previously used by BK Technologies, Inc. In addition, the common stock of BK Technologies Corporation was assigned a new CUSIP Number: 05587G 104. The holding company has the same directors and executive officers as its predecessor, BK Technologies, Inc.
For the purpose of this report, references to “we” or the “Company” or our management or business at any period prior to the holding company reorganization (March 28, 2019) refer to those of BK Technologies, Inc., as the predecessor company and its subsidiaries and thereafter to those of BK Technologies Corporation and its subsidiaries, except as otherwise specified or to the extent the context otherwise indicates.
Impact of COVID-19 Pandemic
In December 2019, a novel strain of the coronavirus (COVID-19) surfaced, in Wuhan, China, which spread globally and was declared a pandemic by the World Health Organization in March 2020. The challenges posed by the COVID-19 pandemic on the global economy increased significantly asin the first quarterseveral months of 2020 progressed.2020. In response to COVID-19, national and local governments around the world instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders, and recommendations to practice social distancing. We are considered an “essential business” that is supporting first responders and our manufacturing operations have remained open duringthroughout the pandemic. Accordingly, we haveWe implemented certain policies at our offices in accordance with best practices to accommodate, and at times mandate, social distancing, wearing face masks, and remote work practices. Among other things, we have invested in employee safety equipment, additional cleaning supplies and measures, adjusted production lines and work placesworkplaces as necessary and adapted new processes for interactions with our suppliers and customers to safely manage our operations. OneIn 2021 to-date, two staff member hasmembers at our primary facility in West Melbourne, Florida, tested positive for COVID-19 to date. This employee wasCOVID-19. These employees were quarantined and worked remotely in accordance with accepted safety practices and is working remotely. Also, inuntil after passing subsequent testing.
In planning for the possible disruption of our business, we have takentook steps to reduce expenses throughout the Company. This included suspending all Company travel for a period of time, as well as our participation in trade shows and other business meetings, instituting strict inventory control and decreasing capital expenditures. We also implemented workforce reductions during the second quarter of 2020, decreasing employment and related expenses by approximately 18%. During as well as suspended the employer’s 401K match. For the first sixthree months of 2021, the impact to customer orders was limited as reflected by our sales, which were comparable to sales foris unknown with any certainty. Early in the same period last year.Also, whilepandemic some of our supply chain partners were temporarily closed, during the early stages of the pandemic,however most of these partners resumed operationsoperations. Recently, worldwide shortages of materials, particularly semiconductors and integrated circuits, have resulted in limited supplies and extended lead times for certain components used in our products. While, generally, we have been able to procure the materialsmaterial necessary to manufacture our products and fulfill customer orders. Depending onorders, there have been some delays and longer delivery times within our supply chain. While the progression and duration of the pandemic,these shortages is not known with certainty, they may last for several quarters or years. The impact on our ability to obtain necessary suppliesoperations of such shortages, or additional shortages that may surface, is uncertain, but could potentially impact our future sales, manufacturing operations and ship finished products to customers may be partly or completely disrupted.financial results. Continued progression of the pandemicthese circumstances could result in a decline in customer orders, as our customers could shift purchases to lower-priced or other perceived value offerings or reduce their purchases and inventories due to decreased budgets, reduced access to credit or various other factors, and impair our ability to manufacture our products, which could have a material adverse impact on our results of operations and cash flow. While the current impacts of COVID-19 are reflected in our results of operations, we cannot at this time separate the direct COVID-19 impacts from other factors that cause our performance to vary from yearquarter to year.quarter. The ultimate duration and impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration and severity of the pandemic, including whether there is a “second wave,” and the related length of its impact on the global economy, which are uncertain and given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, cannot be predicted at this time. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of its national and, to some extent, global economic impact, including any recession that has occurred or may occur in the future.impact. Furthermore, the extent to which our mitigation efforts are successful, if at all, is not presently ascertainable. However, we anticipate that our results of operations in future periods may continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions. For additional risks relating to the COVID-19 pandemic, see Item 1A. Risk Factors in Part II of this report.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, ReliefWe 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 Economic Security Act (the “CARES Act”). Among other things, the CARES Act includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. On April 13, 2020, we received an unsecured Loan (as defined below)appropriations. We may also experience fluctuations in the amount of $2,196,335 under the Paycheck Protection Program (or “PPP”) established under the CARES Act, as further discussed below under “Liquidity and Capital Resources.” We intended to use the Loan for qualifying expensesour quarterly results, in accordance with the terms of the CARES Act. At the time of application, we believed we qualified to receive the funds pursuant to the PPP.
On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the qualification requirements for a PPP loan. In April 2020, out of an abundance of caution, we repaid the loan in full.
On May 4, 2020, the Company implemented workforce reductions of approximately 18% to reduce costs and to better position the Company in an uncertain business environment resulting from the COVID-19 pandemic. The Company incurred approximately $221,000 in severance costs relating to these workforce reductions, which were recognized in the second quarter of 2020 and will be paid accordingpart, due to our normal payroll practices through September 2020.
Our stock repurchase program terminatedsales to federal and state agencies that participate in April 2020 and was not renewed.
Second Quarter and Six Months Summary
Overall, our financial and operating results forwildland fire-suppression efforts, which may be greater during the three and six months ended June 30, 2020 were comparable with the same periods of last year and improvedsummer season when forest fire activity is heightened. In some years, these factors may cause an increase in some respects. For the first half of 2020, sales were materially unchanged from last year’s six-month period. While sales for the second quarterand first quarters, compared with the first and fourth quarters of 2020 were belowthe same fiscal year. Such increases in sales may cause quarterly variances in our cash flow from operations and overall financial condition.
First Quarter Summary
Sales for last year’s second quarter, this was offset bythe first quarter 2020 sales, which exceeded last year’s first quarter sales. Gross profit margins as a percentage of sales for the second quarter and six-month periods of 2020 improvedended March 31, 2021, decreased compared with the same periods for the prior year, while cost of last yearsales and compared with the immediately preceding quarter. Selling,selling, general and administrative expenses for the second quarter and six months of 2020 were significantly lower compared with the same periods last year and compared with the immediately preceding quarter. Combined, these factors contributed to an improvement in operating performance, yielding a significantly reducedalso decreased. Accordingly, our operating loss for the six-month periodfirst quarter of 20202021 was slightly higher, compared with the same periodfirst quarter last year. Furthermore, during the first six months of 2020, we reduced inventory by approximately $4.0 million, which was a primary factor enabling us to generate positive cash flow from operations.
For the secondfirst quarter of 2020,2021, our sales decreased 25.3% tototaled approximately $9.9$8.6 million, compared with approximately $13.3$10.9 million for the same quarter last year. For the six months ended June 30, 2020, sales totaled approximately $20.8 million, which were materially unchanged from the same period last year.
Gross profit margins as a percentage of sales for the secondfirst quarter of 2020 improved to2021 were approximately 43.6%36.2%, compared with 42.9%35.8% for the secondfirst quarter last year. For the six-month period ended June 30, 2020, gross profit margins as a percentage of sales improved to 39.5%, compared with 38.9% for the same period last year.
Selling, general and administrative expenses (“SG&A”) for the secondfirst quarter of 20202021 decreased 23.2%16.2% ($770,000) to approximately $4.4$4.0 million, compared with approximately $5.7$4.7 million for the same quarter last year. SG&A expenses
For the first quarter of 2021, our operating loss was approximately $877,000, compared with approximately $848,000 for the first six months of 2020 decreased 12.7% to approximately $9.1 million, compared with approximately $10.4 million for the same periodquarter last year.
ForOutside of our core public safety land mobile radio operations, for the secondfirst quarter of 2020, we recognized an operating loss of approximately $36,000, compared with operating income of approximately $20,000 for the same quarter last year. For the six-month period of 2020, we reduced our operating loss by approximately $1.4 million to approximately $884,000, compared with an operating loss of approximately $2.3 million for the same period last year.
For the second quarter of 2020,2021, we recognized an unrealized lossgain totaling $200,000$205,000 on our investment in 1347 Property Insurance Holdings, Inc. (“PIH”),FGF, made through FGI 1347 Holdings, LP, a consolidated variable interest entity. This compares with an unrealized loss of $148,000$306,000 on the investment for the secondfirst quarter last year. For the six-month period ended June 30, 2020, we recognized an unrealized loss of approximately $506,000, compared with an unrealized gain of $444,000 for last year’s six-month period.2020.
NetOur net loss for the three months ended June 30, 2020 wasMarch 31, 2021, narrowed by 41.8% ($498,000) to approximately $302,000$694,000 ($0.020.06 per basic and diluted share), compared with a loss of approximately $247,000$1.2 million ($0.020.09 per basic and diluted share) for the same quarter last year. For the six months ended June 30, 2020, our net loss totaled approximately $1.5 million ($0.12 per basic and diluted share), compared with approximately $1.6 million ($0.12 per basic and diluted share) for the same period last year.
As of June 30, 2020,March 31, 2021, working capital totaled approximately $13.4$13.2 million, of which approximately $10.5$10.9 million was comprised of cash, cash equivalents and trade receivables. As of December 31, 2019,2020, working capital totaled approximately $14.5$15.1 million, of which approximately $8.6$13.3 million was comprised of cash, cash equivalents and trade receivables.
Results of Operations
As an aid to understanding our operating results for the periods covered by this report, the following table shows selected items from our condensed consolidated statements of operations expressed as a percentage of sales:
| |
Percentage of Sales
Three Months Ended
| Percentage of Sales
Six Months Ended |
| | | | | |
| Sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of products | (56.4) | (57.1) | (60.5) | (61.1) |
| Gross margin | 43.6 | 42.9 | 39.5 | 38.9 |
| Selling, general and administrative expenses | (43.9) | (42.7) | (43.7) | (49.8) |
| Other (expense) income | (2.4) | (0.8) | (2.9) | 2.5 |
| Loss before income taxes | (2.7) | (0.9) | (7.0) | (8.4) |
| Income tax (expense) benefit | (0.3) | (1.2) | (0.1) | 1.0 |
| Net loss | (3.0)% | (1.8)% | (7.2)% | (7.5)% |
| | Percentage of Sales Three Months Ended |
| | | |
| Sales | 100.0% | 100.0% |
| Cost of products | (63.8) | (64.2) |
| Gross margin | 36.2 | 35.8 |
| Selling, general and administrative expenses | (46.4) | (43.6) |
Other income (expense) | 2.1 | (3.2) |
| Loss before income taxes | (8.1) | (11.0) |
| Income tax benefit | 0.0 | 0.0 |
| Net loss | (8.1)% | (11.0)% |
Net Sales
For the secondfirst quarter ended June 30, 2020,March 31, 2021, net sales totaled approximately $9.9$8.6 million, compared with approximately $13.3$10.9 million for the same quarter last year. Sales
The decrease in sales for the sixthree months ended June 30, 2020 totaled approximately $20.8 million, compared with approximately $20.9 millionMarch 31, 2021, was attributed primarily to a delay in anticipated orders from existing federal customers. We believe these remain viable prospective sales opportunities and are continuing to pursue them for the six-month period last year.
During the second quarter of 2019, demand from federal and certain state customers was stronger following the federal government shutdown early in 2019. Also, whilefuture quarters. Although the precise impact to sales cannot be quantified, procurement activities of some customers were likely affected by the COVID-19 pandemic during the secondfirst quarter of 2020. Despite such factors, sales forended March 31, 2021.
In the second quarterhalf of 2020, remained relatively consistent, totaling over 91% of first quarter 2020 sales. Accordingly, for the six-month period of 2020, sales were approximately the same level compared with the last year’s six-month period. Customers forwe launched the first six months of 2020 included federal and state agencies as well as dealers.
Earlier in 2020, we reorganized our sales resources to more effectively focus on target markets and customers where we believe we can maximize our sales success. Our funnel of sales prospects for coming quarters includes potential new customers in federal, state and local public safety agencies. We believe the reorganization and our current sales funnel better position us to capture new sales opportunities moving forward.
While the potential impacts of the COVID-19 outbreak in coming months and quarters remain uncertain, such effects have the potential to materially adversely impact our customers, which could reduce customer orders, and our supply chain, which could impair our ability to fulfill customer requirements in a timely manner, or at all. Such negative effects on our customers and suppliers could materially adversely affect our future business, operations and financial results.
Design of the initial productmodel in our new BKR Series productof APCO Project 25 land mobile radio products and solutions, the BKR 5000. The BKR Series is envisioned as a comprehensive line has been completed, and we anticipate it will be availableof new products with additional new models planned for sale in during the second half oflater this year, and moving forward. Additional models are planned for introduction in the future. Availabilityincluding products with multi-band capability. The timing of the initial BKR Series product for sale and/or development ofdeveloping additional BKR Series products and bringing them to market could be delayedimpacted by various factors, including potential impacts related to the COVID-19 pandemic. BKR Series products, we believe, should increase our addressable market by expanding the number of federal and other public safety customers that may purchase our products. However, the timing and size of orders from agencies at all levels can be unpredictable and subject to the influence of budgets, priorities, and other factors. Accordingly, we cannot assure that sales will occur under particular contracts, or that our sales prospects will otherwise be realized.
In 2020, we reorganized our sales resources to focus more effectively on target markets and customers where we can realize sales success. The current funnel of sales prospects includes potential new customers in federal, state, and local public safety agencies. We believe the reorganization and our sales funnel better positions us to capture new sales opportunities moving forward.
While the potential impacts of the COVID-19 pandemic in coming months and quarters remain uncertain, such effects have the potential to adversely impact our customers and our supply chain. Such negative effects on our customers and suppliers could adversely affect our future sales, operations, and financial results.
Cost of Products and Gross Profit Margin
Gross profit margins as a percentage of sales for the secondfirst quarter ended June 30, 2020 improved toMarch 31, 2021, were approximately 43.6%36.2%, compared with 42.9%35.8% for the same quarter last year. For the six-month period ended June 30, 2020, gross profit margins improved to approximately 39.5%, compared with 38.9% 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. GrossWhile gross profit margins for the secondfirst quarter of 2020 increased compared2021 were materially consistent with the same periodquarter last year, and compared withthey were adversely impacted by approximately 3.3% for one-time inventory reserves related to our legacy product line, the preceding quarter primarily due to a more favorable mix of product sales and increased manufacturing volumes. DuringKNG series. Absent this impact, gross profit margins for the secondfirst quarter of 2021 would have been approximately 39.5%. In 2020, we also reduced manufacturing operations employment by approximately 21%, as well asand other relatedmanufacturing-related expenses. These reductions have improved our utilization and absorption of manufacturing and support expenses, contributing favorably to gross profit margins.
For the six months ended June 30, 2020, gross profit margins improved compared with the six-month period last year, although they were below typical historical levels as the mix of product sales during the first quarter of 2020 was more heavily weighted toward lower margin products compared with the first quarter last year. Additionally, during the first quarter of 2020, more customer orders were fulfilled with on-hand inventory in concert with our inventory reduction program, which had a positive impact on margins. Consequently, gross profit margins were impacted by lower manufacturing volumes, resulting in suboptimal utilization and absorption of manufacturing and support expenses. During the first quarter last year, our sales and manufacturing volumes were adversely impacted by the federal government shutdown, resulting in under-absorption of support and overhead expenses.
We utilize a combination of internal manufacturing capabilities and contract manufacturing relationships for production efficiencies and to manage material and labor costs, andcosts. While we anticipate continuing to do so in the future.future, we have increased, and are continuing to increase, our utilization of U.S.-based resources, which provides greater security and control over our production. We believe that our current manufacturing capabilities and contract relationships or comparable alternatives will continue to be available to us. Although in the future we may encounter new product cost and competitive pricing pressures, the extent of their impact on gross margins, if any, is uncertain.
During recent quarters, worldwide shortages of semiconductors and integrated circuits have resulted in limited supplies and extended lead times for certain components used in our products. While, generally, we have been able to procure the material necessary to manufacture our products and fulfill customer orders, there have been some delays and extended lead times within our supply chain. While the progression and duration of these shortages is not known with certainty, they may last for several quarters or years. The impact on our operations of such shortages, or additional shortages that may surface, is uncertain, but could potentially impact our future sales, manufacturing operations and financial results.
Selling, General and Administrative Expenses
SG&A expenses consist of marketing, sales, commissions, engineering, product development, management information systems, accounting, headquarters, and non-cash share-based employee compensation expenses.
SG&A expenses for the secondfirst quarter ended June 30, 2020March 31, 2021, decreased by $1.3 million,$770,000, or 23.2%16.2%, to approximately $4.4$4.0 million (43.9%(46.4% of sales), compared with approximately $5.7$4.7 million (42.7%(43.6% of sales) for the same quarter last year. For the six months ended June 30, 2020, SG&A expenses decreased by $1.3 million, or 12.7%, to approximately $9.1 million (43.7% of sales), compared with approximately $10.4 million (49.8% of sales), for the six-month period last year. Consistent with employment and expense reductions in our manufacturing operations, during the second quarter of 2020, we reduced SG&A employment, by approximately 15%, as well as other expenses in sales, go-to-market, engineering, and headquarters. These reductions impacted SG&A expenses for the first quarter of 2021 but were made subsequent to last year’s first quarter.
Engineering and product development expenses for the secondfirst quarter of 20202021 decreased $1.1 million,$219,000, or 35.2%10.7%, to approximately $2.0$1.8 million (20.2%(21.3% of sales), compared with approximately $3.1$2.0 million (23.3%(18.8% of sales) for the same quarter of last year. For the six months ended June 30, 2020, engineering and product development expenses totaled approximately $4.1 million (19.5% of sales), compared with approximately $5.2 million (25.1% of sales) for the six-month period last year. Product development expensesExpenses related to an anticipatedthe design and development of the BKR series, a new line of portable and mobile radios, with enhanced features,decreased as certain project phases were completed and most ongoing development activities migrated to our internal engineering team and away from external resources. Development of the BKR Series, decreased as development activities migrated away from external resources toincluding our new internalplanned multiband product, is the primary focus of our engineering team. This team is also involved with our multiband radio development, which was reevaluated in the fourth quarter of 2019. Design improvements identified by the reevaluation are in process. The precise date for developing and introducing the multiband product in the market remainsnew products is uncertain and couldcan be impacted by, among other things, the potential effects of the COVID-19 pandemic in coming months.
Marketing and selling expenses for the secondfirst quarter of 20202021 declined by approximately $311,000,$562,000, or 24.4%37.4%, to approximately $964,000 (9.7%$939,000 (11.0% of sales), compared with approximately $1.3$1.5 million (9.6%(13.8% of sales) for the secondfirst quarter last year. For the six months ended June 30, 2020, marketing and selling expenses declined approximately $218,000, or 8.1%, to approximately $2.5 million (11.9% of sales), compared with approximately $2.7 million (12.9% of sales). The decreases are attributed to reductions in sales and go-to-market employment, as well as other sales, marketing, and marketinggo-to-market related expenses.
Other general and administrative expenses for the secondfirst quarter 20202021 totaled approximately $1.4$1.2 million (14.0%(14.1% of sales), and were materially consistent compared with approximately $1.3$1.2 million (9.8%(11.0% of sales) for the same quarter last year. For the six months ended June 30, 2020, general and administrative expenses totaled approximately $2.6 million (12.5% of sales), compared with approximately $2.5 million (11.9% of sales) for the six-month period last year. Decreases in employment and other headquarters expenses were more than offset by severance costs recognized in the second quarter of 2020 related to our reduction in employment.
Operating Income (Loss)Loss
Our operating loss for the first quarter ended March 31, 2021, was approximately $877,000 (10.2%), compared with a loss of $848,000 (7.8% of sales) for last year’s first quarter. The operating loss for the secondfirst quarter ended June 30, 2020 totaled approximately $36,000, compared with operating income of $20,000 for last year’s second quarter. For the six months ended June 30, 2020, our operating loss improved 61.5% from the same period last year, totaling approximately $884,000 (4.2% of sales), compared with approximately $2.3 million (11.0% of sales) for the six-month period last year. The reduced operating loss for the first six months of 2020 was primarily attributed to2021 reflects a decrease in sales and gross profit margin improvements, while reducing employment and other operating expenses.margins, which were partially offset by SG&A expense reductions.
Other (Expense) Income
We recorded net interest expense of approximately $6,000$4,000 for the secondfirst quarter ended June 30, 2020,of 2021, compared with net interest income of approximately $46,000$9,000 for the secondfirst quarter of last year. For the six months ended June 30, 2020, net interest income totaled approximately $3,000, compared with approximately $101,000 for the six-month period last year. Reduced interest income wasyear, primarily theas a result of financing the purchase of manufacturing equipment, combined with lower averageinterest rates and cash balances.
DuringFor the first six monthsquarter of 2020, we had no outstanding borrowings under the Credit Agreement (defined below), and therefore did not incur any interest expense on any outstanding borrowings under the Credit Agreement.
Additionally, on September 25, 2019, through a wholly-owned subsidiary, we entered into a Master Loan Agreement with U.S. Bank Equipment Finance, a division of U.S. Bank National Association, in the amount of $425,000, to finance various items of equipment. The loan is collateralized by equipment. The agreement has a term of five years and bears a fixed interest rate of 5.11%.
For the second quarter ended June 30, 2020,2021, we recognized an unrealized lossgain of $200,000$205,000 on our investment in PIH,FGF, compared with $148,000 for the second quarter last year. For the six months ended June 30, 2020, we recognized an unrealized loss of approximately $506,000 on our investment in PIH, compared with an unrealized gain of $444,000$306,000 for the same periodfirst quarter last year.
Income Taxes
We recorded an income tax expense of approximately $28,000 for the three and six months ended June 30, 2020, compared with an income tax expense of approximately $154,000 for the second quarter last year and anno income tax benefit of $201,000or expense for the six-month period last year. Our income tax expense is derived from the change in valuation allowance related to net operating loss carryforwards (“NOLs”) for the statefirst quarter of Florida that are anticipated to expire unutilized in2021 or 2020.
Our income tax provision is based on management’s estimate of the effective tax rate for the full year. The tax provision (benefit) in any period will be affected by, among other things, permanent, as well as temporary, differences in the deductibility of certain items, in addition to changes in tax legislation. As a result, we may experience significant fluctuations in the effective book tax rate (that is, tax expense divided by pre-tax book income) from period to period.
As of June 30, 2020,March 31, 2021, our net deferred tax assets totaled approximately $4.3 million, and were primarily derived from research and development tax credits, operating loss carryforwards and deferred revenue.
In order to fully utilize the net deferred tax assets, we will need to generate sufficient taxable income in future years. We analyze all positive and negative evidence to determine if, based on the weight of available evidence, we are more likely than not to realize the benefit of the net deferred tax assets. The recognition of the net deferred tax assets and related tax benefits is based upon our conclusions regarding, among other considerations, estimates of future earnings based on information currently available and current and anticipated customers, contracts, and product introductions, as well as historical operating results and certain tax planning strategies.
Based on our analysis of all available evidence, both positive and negative, we have concluded that we do not have the ability to generate sufficient taxable income in the necessary period to utilize the entire benefit for the deferred tax assets.asset. Accordingly, we established a valuation allowance of $28,000 related to state of Florida NOLs that are anticipated to expire unutilized in 2020.$98,000. 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, 2020.March 31, 2021.
Liquidity and Capital Resources
For the six monthsfirst quarter ended June 30, 2020,March 31, 2021, net cash provided by operating activities totaled approximately $3.6 million,$39,000, compared with cash used in operating activities of approximately $1.3 million$915,000 for the same period of last year.year’s first quarter. Cash provided by operating activities for the six monthsfirst quarter ended June 30, 2020,March 31, 2021, was primarily related to a decrease in inventory, combined with increases incollections of accounts receivable, increased accounts payable, and depreciation and amortization, and deferred revenue, as well as an unrealized loss on our investment in PIH. These itemswhich were partially offset by aour net loss, increased inventories and decreasesa decrease in accounts payable, accrued compensation and related taxes, and accrued warranty expenses.taxes.
For the six months ended June 30, 2020,first quarter of 2021, we had a net loss of approximately $1.5$0.7 million, compared with approximately $1.6$1.2 million for the same period last year. Net inventoriesAccounts receivable decreased approximately $1.4 million during the six months ended June 30,first quarter of 2021 due primarily to collections. For the first quarter of 2020, byaccounts receivable increased approximately $3.9 million, compared with an increase of approximately $1.8 million for the same period last of year. The decrease$626,000. Accounts payable for the first six monthsquarter of 2020 was2021 increased approximately $299,000, compared with a decrease of approximately $474,000 for the first quarter last year, primarily attributabledue to product sales combined with our inventory reduction program.purchases from suppliers. Depreciation and amortization totaled approximately $661,000$298,000 for the six months ended June 30, 2020,first quarter of 2021, compared with approximately $575,000$320,000 for the same periodfirst quarter last year,year. Depreciation and amortization are primarily due to capital expenditures related to manufacturing and engineering equipment. Deferred revenueGross inventories increased during the first quarter of 2021 by approximately $1.4 million, compared with a decrease of approximately $2.5 million for the six months ended June 30, 2020 increasedfirst quarter last year. The increase for the first quarter of 2021 was primarily attributable to lower product sales combined with extended supplier lead-times. Accrued compensation and related taxes decreased by approximately $557,000,$315,000 for the first quarter of 2021, compared with approximately $417,000a decrease of $226,000 for the same periodfirst quarter last year, which was attributedyear. The decreases were primarily related to the salespayment of extended warranties.employee incentives. Unrealized lossesgains on securities for the six months ended June 30, 2020first quarter of 2021 totaled approximately $506,000,$205,000, compared with gainslosses of approximately $444,000$306,000 for last year’s six-month period.first quarter. For additional information pertaining to our investment in securities, refer to Notes 1 (Condensed Consolidated Financial Statements) and 6 (Investment in Securities) to the condensed consolidated financial statements included in this report. Accounts payable for the six months ended June 30, 2020, decreased approximately $838,000, compared with an increase of approximately $1.2 million for the same period last year, primarily due to payments to suppliers. Accrued compensation and related taxes for the six months ended June 30, 2020 decreased approximately $331,000, compared with $691,000 for the six-month period last year due to reductions in employment and incentive compensation. Accrued warranty expenses for the six months ended June 30, 2020 decreased approximately $337,000, compared with approximately $106,000 for the same period last year. The decreases are attributed primarily to manufacturing operations and quality improvements.
Cash used in investing activities for the six months ended June 30, 2020first quarter of 2021 totaled approximately $525,000 and was attributed to purchases of property, plant and$1.0 million, primarily for manufacturing equipment. For the same period last year,first quarter of 2020, cash used in investing activities totaled approximately $1.5 million,$131,000, primarily for engineering and was also attributed to purchases of property, plant andmanufacturing related equipment.
For the six months ended June 30, 2020,first quarter of 2021, cash of approximately $809,000$529,000 was used inprovided by financing activities. During the periodfirst quarter we received proceeds totalingof approximately $2.2 million under$800,000 related to financing the PPP, which were repaidpurchase of manufacturing equipment. We used cash of approximately $250,000 to pay quarterly dividends in full withinboth the same period. Wefirst quarter of 2021 and 2020. During the first quarter of 2020, we also used cash for our capital return program, which included quarterly dividends totaling approximately $502,000 and stock repurchases totaling approximately $269,000. Our stock repurchase program terminated in April 2020 and was not renewed. For the six-month period last year, approximately $510,000 was used to pay dividends and approximately $550,000 was used$243,000 for stock repurchases. We used approximately $21,000 and $19,000, for the repayment of debt during the first quarter of 2021 and 2020, respectively.
On April 13,January 26, 2021, our revolving credit facility, which originated on January 30, 2020, was extended for one year, through January 31, 2022.
BK Technologies, Inc., our wholly-owned operating subsidiary, received approval and funding pursuant to a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $2,196,335 (the “Loan”) under the PPP. The PPP was established under the CARES Act and is administered by the U.S. Small Business Administration (“SBA”). The Loan was made through JPMorgan Chase Bank, N.A. (“JPMC”). We intended to use the Loan for qualifying expenses in accordance with the terms of the CARES Act. At the time of application, we believed we qualified to receive the funds pursuant to the PPP.
On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the qualification requirements for a PPP loan. In April 2020, out of an abundance of caution, the Company repaid the loan in full.
On May 4, 2020, the Company implemented workforce reductions of approximately 18% to reduce costs and to better position the Company in an uncertain business environment resulting from the COVID-19 pandemic. The Company incurred approximately $221,000 in severance costs relating to these workforce reductions, which were recognized in the second quarter of 2020 and is being paid under our customary payroll practices through September 2020.
On January 30, 2020, BK Technologies, Inc., our wholly-ownedwholly owned subsidiary, entered into a $5.0the $5 million Credit Agreement and a related Line of Credit Note (the “Note” and collectively with the Credit Agreement, the “Credit Agreement”) with JPMC. The Credit Agreement provides for a revolving line of credit of up to $5.0$5 million, with availability under the line of credit subject to a borrowing base calculated as a percentage of accounts receivable and inventory. The line of credit will expire on January 31, 2021. Proceeds of borrowings under the Credit Agreement may be used for general corporate purposes. The line of credit is collateralized by a blanket lien on all personal property of BK Technologies, Inc. pursuant to the terms of the Continuing Security Agreement with JPMC. WeBK Technologies Corporation and each subsidiary of BK Technologies, Inc., are guarantors of BK Technologies, Inc.’sthe obligations under the Credit Agreement, in accordance with the terms of the Continuing Guaranty.
Borrowings under the Credit Agreement will bear interest at a rate per annum equal to one-month LIBOR (or zero if the LIBOR is less than zero) plus a margin of 1.90%. The line of credit is to be repaid in monthly payments of interest only, payable in arrears, commencing on February 1, 2020, with all outstanding principal and interest to be payable in full at maturity.
The Credit Agreement contains certain customary restrictive covenants, including restrictions on liens, indebtedness, loans and guarantees, acquisitions and mergers, sales of assets, and stock repurchases by BK Technologies, Inc. The Credit Agreement contains one financial covenant requiring BK Technologies, Inc., to maintain a tangible net worth of at least $20.0$20 million at any fiscal quarter end.
The Credit Agreement provides for customary events of default, including: (1) failure to pay principal, interest or fees under the Credit Agreement when due and payable; (2) failure to comply with other covenants and agreements contained in the Credit Agreement and the other documents executed in connection therewith; (3) the making of false or inaccurate representations and warranties; (4) defaults under other agreements with JPMC or under other debt or other obligations of BK Technologies, Inc.; (5) money judgments and material adverse changes; (6) a change in control or ceasing to operate business in the ordinary course; and (7) certain events of bankruptcy or insolvency. Upon the occurrence of an event of default, JPMC may declare the entire unpaid balance immediately due and payable and/or exercise any and all remedial and other rights under the Credit Agreement.
BK Technologies, Inc. was in compliance with all covenants under the Credit Agreement as of June 30, 2020March 31, 2021, and the date of filing this report. As of June 30, 2020March 31, 2021, and the date of filing this report, thereapproximately $800,000 in borrowings were no borrowings outstanding under the Credit Agreement and there was approximately $3.9 million of borrowing available under the Credit Agreement.
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 $425,000 to finance items of manufacturing equipment. The loan is collateralized by the equipment purchased using the proceeds. The Master Loan Agreement has a term of five years and bears a fixed interest rate of 5.11%.
Our cash and cash equivalents balance at June 30, 2020March 31, 2021, was approximately $6.9$6.4 million. We believe these funds, combined with our cost-saving initiatives, anticipated cash generated from operations and borrowing availability under our Credit Agreement, are sufficient to meet our working capital requirements for the foreseeable future. We may, depending on a variety of factors, including market conditions for capital raises, the trading price of our common stock and opportunities for uses of any proceeds, engage in public or private offerings of equity or debt securities to increase our capital resources. However, financial and economic conditions, including those resulting from the COVID-19 pandemic, could limit our access to credit and impair our ability to raise capital, if needed, on acceptable terms or at all. We also face other risks that could impact our business, liquidity, and financial condition. For a description of these risks, see “Item 1A. Risk Factors” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 20192020, and “Item 1A. Risk Factors” below in this report.
Critical Accounting Policies
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In response to the Securities and Exchange Commission’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions. These processes affect our reported revenues and current assets and are, therefore, critical in assessing our financial and operating status. We regularly evaluate these processes in preparing our financial statements. The processes for revenue recognition, allowance for collection of trade receivables, allowance for excess or obsolete inventory, software development and income taxes involve certain assumptions and estimates that we believe to be reasonable under present facts and circumstances. These estimates and assumptions, if incorrect, could adversely impact our operations and financial position.
There were no changes to our critical accounting policies during the quarter ended June 30, 2020,March 31, 2021, as described in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020.
Subsequent Event
On April 6, 2021, BK Technologies, Inc., a wholly owned subsidiary of BK Technologies Corporation, and JPMC, as a lender, entered into a Master Loan Agreement in the amount of $743,000 to finance various items of manufacturing equipment. The loan is collateralized by the equipment purchased using the proceeds. The Master Loan Agreement is payable in 48 equal monthly principal and interest payments of approximately $16,000 beginning on May 8, 2021, matures on April 8, 2025, and bears a fixed interest rate of 3.0%.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item.
Evaluation of Disclosure Controls and Procedures
OurWe maintain disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President (who serves as our principal executive officer) and Chief Financial Officer (who serves as our principal financial and accounting officer) have evaluated, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our President (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act Rule 13a-15(e))Act), as of June 30, 2020.the end of the period covered by this Quarterly Report. Based on thisupon that evaluation, they haveour President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.the end of the period covered by this Quarterly Report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including each of such officers as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2020,March 31, 2021, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20192020, includes a detailed discussion of the Company’s risk factors. There have been no material changes to the risk factors as disclosed in our Annual Report, except as set forth below. However, many of the risk factors disclosed in Item 1A of our Annual Report have been, and we expect will continue tomay be further heightened or exacerbated by the impact of the COVID-19 pandemic.
The COVID-19 pandemic and ensuing governmental responses have negatively impacted, and could further materially adversely affect, our business, financial condition, results of operations and cash flow.
In December 2019, a novel strain of the coronavirus (COVID-19) surfaced in Wuhan, China, which spread globally and was declared a pandemic by the World Health Organization in March 2020. We expect Although we believe the COVID-19 pandemic to havehas not had a material adverse impact on our business and financial performance.in 2020, it may have the potential of doing so in the future. The extent of the potential impact of the COVID-19 pandemic on our business and financial performance including our ability to execute our near-term and long-term business strategies and initiatives, such as the launch of products in the BKR Series, in the expected time frame, will depend on future developments, including the duration and severity of the pandemic, including whether there is a “second wave,” which are uncertain and, given the dailycontinuing evolution of the COVID-19 pandemic and the global responses to curb its spread, cannot be predicted. In addition, the pandemic has significantly increased economic and demand uncertainty and caused a worldwide economic downturn and recession.downturn. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of its national and, to some extent, global economic impact, including any recession that has occurred or may occur in the future.
In response to COVID-19, national and local governments around the world instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders, and recommendations to practice social distancing. Although many governmental measures have had specific expiration dates, some of those measures have already been extended more than once or re-implemented as cases of COVID-19 increased in certain areas; as a result, there is considerable uncertainty regarding the duration of such measures and potential future measures. Measures providing for business shutdowns generally exclude certain essential services, and those essential services commonly include critical infrastructure and the businesses that support that critical infrastructure, which includes our business. While our manufacturing operations have remained open, these measures have impacted and may further impact our workforce and operations, as well as those of our customers vendors and suppliers.
We have modified our business practices and implemented certain policies at our offices in accordance with best practices to accommodate, and at times mandate, social distancing, and remote work practices, including restricting employee travel, modifying employee work locations, implementing social distancing and enhanced sanitary measures in our facilities, and cancelling attendance at events and conferences. In addition, we have invested in employee safety equipment, additional cleaning supplies and measures, re-designed production lines and work placesworkplaces as necessary and adapted new processes for interactions with our suppliers and customers to safely manage our operations. Many of our suppliers vendors and service providers have made similar modifications. Part of our workforce is currently working from home, and the resources available to employees working remotely may not enable them to maintain the same level of productivity and efficiency as working from the Company’s offices. Additionally, these and other employees may face additional demands on their time, such as increased responsibilities resulting from school closures or the illness of family members. Further, our increased reliance on remote access to our information systems increases our exposure to potential cybersecurity breaches. WeIf necessary, we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners, and suppliers. In light of the economic downturn generated by the COVID-19 pandemic, we have taken steps to reduce expenses throughout the CompanyCompany. These reductions have, at various junctures, , including suspending all Companyincluded limiting travel, for a period of time, as well as ourdiscontinuing participation in trade shows and other business meetings, instituting strict inventory control and decreasing capital expenditures,expenditures. We and restructured our operations including,to, among other things, reducingreduce our workforce by approximately 18% during the second quarter of 2020. We incurred costs as a result of the workforce reduction, including approximately $221,000 in severance costs, which were recognized in the second quarter of 2020, and there can be no assurance that we will be able to rehire our workforce in the event our business experiences a subsequent recovery.2020. There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19, in which case our employees may become sick, our ability to perform critical functions could be harmed, and our business and operations could be negatively impacted. We have had one employeetwo employees at our primary West Melbourne, Florida facility test positive for COVID-19 to date.to-date. The employee wasemployees were quarantined in accordance with accepted safety practices and is working remotely.returned to work only after clearing accepted health protocols. There was no disruption of our operations as a result of these occurrences. The resumption of normal business operations after such interruptions may be delayed or constrained by lingering effects of COVID-19 on our suppliers, third-party service providers, and/or customers.
In addition, we have experienced delays and cost increases, and may continue to do so,Early in obtaining and transporting supplies. Since the outbreak,pandemic some of our supply chain partners were temporarily closed, for a period of time.Mosthowever most of these facilitiespartners resumed operations. Recently, worldwide shortages of materials, particularly semiconductors and integrated circuits, have been reopened. Althoughresulted in limited supplies and extended lead times for certain components used in our products. While, generally, we have in some cases experienced delays and increased freight costs, we have, to date, been able to procure the materialsmaterial necessary to manufacture our products and fulfill customer orders, whichthere have been some delays, longer delivery times and increased costs within our supply chain. While the progression and duration of these shortages is not known with certainty, they may not continue to be the case in the event the pandemic worsenslast for several quarters or continues for an extended periodyears. The impact on our operations of time. Depending on the continued progression of the pandemic,such shortages, or additional shortages that may surface, is uncertain, but could potentially disrupt our ability to obtain necessary supplies, manufacture our products and ship finished products, to customers may be disrupted.adversely impacting our financial and operating results.
Further, our current and potential customers’ businesses could be disrupted or they could seek to limit spending, including shifting purchases to lower-priced or other perceived value offerings or reducing their purchases and inventories due to decreased budgets, reduced access to credit or various other factors, any of which could negatively impact the willingness or ability of such customers to place new, or any, orders with us and ultimately adversely affect our revenues, as well as negatively impact the payment of accounts receivable and collections and potentially lead to write-downs or write-offs.
The ultimate duration and impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which remain uncertain and cannot be predicted at this time. Furthermore, the extent to which our mitigation efforts are successful, if at all, is not presently ascertainable. However, we expect that our results of operations, including revenues, in future periods will continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions, which impact may continue even after the COVID-19 pandemic has subsided.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
| Total Number of Shares Purchased | Average Price Paid Per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs (2) |
| 04/01/20-04/30/20 | 16,129 | $1.63 | 16,129 | 0 |
| 05/01/20-05/31/20 | 0 | $0 | 0 | 0 |
| 06/01/20-06/30/20 | 0 | $0 | 0 | 0 |
| Total | 16,129 | $1.63 | 16,129 | |
(1)
Average price paid per share of common stock repurchased is the executed price, including commissions paid to brokers.
(2)
The Company had a repurchase program of up to 1 million shares of the Company’s common stock that could be purchased, from time to time, pursuant to a stock repurchase plan in conformity with the provisions of Rule 10b5-1 and Rule 10b-18 promulgated under the Exchange Act. The repurchase program was initially announced in May 2016 and expanded in June 2017. The program terminated in April 2020 and was not renewed.
Dividend Restrictions
On January 30, 2020,26, 2021, BK Technologies, Inc., our wholly-ownedwholly owned operating subsidiary, entered into theextended its Credit Agreement with JPMC. The Credit Agreement contains limitations and covenants that may limit BK Technologies, Inc.’s ability to take certain actions, including pay dividends to the Company.
On June 24, 2020, the Company entered into a Financial and Consulting Services Agreement (the “Agreement”) with Itasca Financial LLC (“Itasca”), pursuant to which Itasca agreed to advise the Company on aspects of its strategic direction. In exchange for Itasca’s services, the Company agreed to pay Itasca a retainer fee of $50,000, payable in two installments of $25,000, and a monthly fee of $20,000. The Agreement may not be terminated for a period of two months from June 24, 2020, after which time it may be terminated by either party at any time with prior written notice of at least 30 calendar days. As of the date of this report, the Company has paid $45,000 to Itasca and the parties have agreed to suspend the Agreement indefinitely. Upon termination of the Agreement by either party, the Company has agreed to pay Itasca a termination fee of $100,000, which can be payable in a combination of cash and stock at the Company’s discretion, and if any such fee is paid in stock, then the Company has agreed to grant Itasca unlimited piggyback registration rights for such stock. The Agreement also includes expense reimbursement provisions and indemnification provisions in favor of Itasca and its affiliates. This description of the Agreement is a summary only and is qualified by reference to full text of Agreement, which is filed as an exhibit to this report.
Fundamental Global Investors, LLC, with its affiliates (collectively, “Fundamental Global”), is the largest stockholder of the Company. D. Kyle Cerminara, the Chief Executive Officer, Co-Founder and Partner of Fundamental Global Investors, LLC, and Lewis M. Johnson, the President, Co-Founder and Partner of Fundamental Global Investors, LLC, are both members of the Company’s Board of Directors, and John W. Struble, Chairman of the Board of Directors, serves as a consultant to Fundamental Global Management, LLC, an affiliate of Fundamental Global Investors, LLC. Fundamental Global is the controlling stockholder of PIH, and Larry G. Swets, Jr. serves as Interim Chief Executive Officer and principal executive officer of PIH and as a member of PIH’s Board of Directors. In addition, Mr. Swets founded and serves as the managing member of Itasca, which provides services to the Company, as described above, as well as to other companies affiliated with Fundamental Global.
Exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index below.
Exhibit Index
Exhibit Number | | Description |
| | Articles of Merger, filed with the Nevada Secretary of State on March 28, 2019 (Incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K12B filed March 28, 2019) |
| | Articles of Incorporation of BK Technologies Corporation (Incorporated by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K12B filed March 28, 2019) |
| | Bylaws of BK Technologies Corporation (Incorporated by reference from Exhibit 3.3 to the Company’s Current Report on Form 8-K12B filed March 28, 2019) |
| | Financial and Consulting Services Agreement, dated June 24, 2020, by and between BK Technologies Corporation and Itasca Financial LLC |
| | Form of Directors’ and Executive Officers’ Indemnification Agreement (Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 23, 2020) |
| | Certification of Principal Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Principal Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K) |
| | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K) |
| Exhibit 101.INS | | XBRL Instance Document |
| Exhibit 101.SCH | | XBRL Taxonomy Extension Schema Document |
| Exhibit 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| Exhibit 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| Exhibit 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| Exhibit 101.DEF | | XBRL Taxonomy Definition Linkbase Document |
* Management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | BK TECHNOLOGIES CORPORATION |
| | (The “Registrant”) |
| | |
Date: August 5, 2020May 13, 2021 | By:/s/ Timothy A. Vitou |
| | Timothy A. Vitou President (Principal executive officer and duly authorized officer) |
| | |
Date: August 5, 2020May 13, 2021 | By:/s/ William P. Kelly |
| | William P. Kelly Executive Vice President and Chief Financial Officer (Principal financial and accounting officer and duly authorized officer) |
| | |