BK Technologies Corp quarterly report, Q2 FY2021

BK Technologies Corporation — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2021; filed August 12, 2021. Financial statements are unaudited. BK Technologies designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components, primarily for government and public-safety customers.

Key Financial Metrics

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Net sales	$11.335 million	$9.937 million	$19.899 million	$20.826 million
Gross margin	37.2%	43.6%	36.7%	39.5%
SG&A expense	$4.553 million	$4.364 million	$8.526 million	$9.107 million
Operating loss	$(342,000)	$(36,000)	$(1.219) million	$(884,000)
Net income (loss)	$1.696 million	$(302,000)	$1.002 million	$(1.494) million
Diluted EPS	$0.12	$(0.02)	$0.08	$(0.12)

The Q2 and six-month net income figures were materially supported by unrealized gains on the company’s investment in FG Financial Group: $2.262 million in Q2 and $2.467 million for the six-month period, compared with unrealized losses in the prior-year periods.

Liquidity, Cash Flow and Capital Structure

Cash and cash equivalents were $15.661 million at June 30, 2021, compared with $6.826 million at December 31, 2020.
Working capital was approximately $25.0 million at June 30, 2021, versus $15.1 million at year-end 2020.
Operating cash flow was negative $2.825 million for the first six months, compared with positive $3.597 million in the prior-year period. The use of cash primarily reflected higher inventory, increased receivables and the non-cash investment gain.
Capital expenditures were $1.541 million, primarily for manufacturing equipment, versus $525,000 in the prior-year period.
Financing activities provided $13.201 million, including $11.559 million of net proceeds from a June public offering of 4,249,250 shares at $3.00 per share.
The company had approximately $1.5 million outstanding under its $5.0 million revolving credit facility and approximately $3.165 million of net availability. The facility matures January 31, 2022, and is secured by company assets.
Other equipment financing included a $743,000 loan entered into in April 2021 at a fixed 3.0% rate, maturing April 2025.
Total liabilities were $17.464 million and stockholders’ equity was $35.027 million at June 30, 2021.

Material Changes Versus the Prior Comparable Period

Q2 sales increased 14.1%, driven primarily by federal legacy customers and western-region state public-safety agencies. Six-month sales declined 4.5% because of weaker first-quarter performance.
Gross margin declined 640 basis points in Q2 and 280 basis points for the six-month period, reflecting unfavorable product mix, higher material and freight costs, and first-quarter inventory reserves related to the legacy KNG product line.
Q2 operating loss increased to $342,000 from $36,000; the six-month operating loss increased to $1.219 million from $884,000 despite lower six-month SG&A.
Net income improved substantially because of the change from investment losses to investment gains, not because of improved operating profitability.
Inventory increased to $12.036 million from $9.441 million at December 31, 2020, primarily due to supplier lead times and planned product introductions. The inventory allowance increased to approximately $888,000 from $520,000.
Shares outstanding increased substantially following the public offering; 16,785,721 shares were outstanding as of August 6, 2021, compared with 12,511,966 at December 31, 2020.
Effective July 1, 2021, the company changed the timing of material burden recognition. Management stated that the change increased inventory and retained earnings by approximately $1.3 million.

Outlook, Commentary and Risks

Management expects supply-chain constraints, including semiconductor and integrated-circuit shortages, to continue potentially for several quarters or years. Delays, higher costs and inability to fulfill orders could adversely affect sales, margins, cash flow and operations.
The company continues developing the BKR Series of APCO Project 25 products, including planned multiband products. Timing and demand remain uncertain and depend on development, supply-chain conditions, customer budgets and government priorities.
U.S. government agencies represented 41.9% of Q2 sales and 34.5% of six-month sales. This concentration exposes the company to government budgets, appropriations, contract compliance and supplier-allocation decisions.
Demand and quarterly results may fluctuate with government fiscal-year spending and seasonal wildland fire activity.
COVID-19-related economic effects, supplier constraints and customer purchasing changes remain difficult for management to quantify.
The company reported no pending material legal claims as of June 30, 2021 and was in compliance with its revolving-credit covenants. The credit agreement requires minimum tangible net worth of $20 million and restricts certain actions, including dividends by the operating subsidiary.
Net deferred tax assets were approximately $4.116 million. Management determined that it could not currently generate sufficient taxable income to realize the entire benefit and recorded a $98,000 valuation allowance; additional allowances may be required if future losses occur.
Management stated that cash, expected operating cash flow and available borrowing capacity should satisfy working-capital needs for the foreseeable future, while acknowledging risks to access to capital and financing terms.

Facts Investors Should Verify

Whether operating profitability and gross margins recover after supply-chain costs, unfavorable product mix and legacy-product inventory reserves.
Whether the reported net income trend can improve without relying on unrealized gains from the FG Financial Group investment.
Inventory levels, purchase commitments of approximately $8.591 million, turnover and potential additional obsolescence reserves.
Progress, customer adoption and timing of the BKR Series, including the planned multiband product.
Availability and renewal or refinancing plans for the revolving credit facility, which matures January 31, 2022.
The effect of the July 1, 2021 material-burden accounting change on subsequent inventory, margins and retained earnings.
Customer concentration, government procurement cycles and the continuing effects of COVID-19 and component shortages.
The impact of the June equity offering and resulting dilution on per-share results and future capital needs.