BK Technologies Corporation — Form 10-Q Summary
Business context and reporting period
BK Technologies Corporation is a holding company whose operating subsidiary provides public-safety communications products and services. Its principal businesses are Radio, which designs and manufactures land-mobile radios, and SaaS, which develops public-safety smartphone applications. This report covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. The financial statements are unaudited.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $19.0 million | $12.1 million | $37.7 million | $18.7 million |
| Gross margin | 27.4% | 14.2% | 26.8% | 17.1% |
| Operating loss | $(0.8) million | $(3.7) million | $(1.8) million | $(7.1) million |
| Net loss | $(1.3) million | $(4.3) million | $(2.6) million | $(8.3) million |
| Basic and diluted loss per share | $(0.39) | $(1.28) | $(0.77) | $(2.45) |
| Net interest expense | $0.2 million | $0.0 million | $0.3 million | $0.0 million |
| Loss on investments | $0.4 million | $0.6 million | $0.5 million | $1.1 million |
- Sales increased 56.9% in the second quarter and 101.7% for the first six months, driven primarily by the BKR 5000 product and fulfillment of prior backlog.
- SG&A expense was $6.0 million in Q2 and $11.9 million for the first six months, increasing 10.8% and 15.0%, respectively, primarily due to sales, engineering, product development and go-to-market activities for the BKR 9000 and other strategic initiatives.
- Cash provided by operating activities was $1.5 million for the first six months of 2023, compared with cash used of $5.3 million in the prior-year period. Cash flow benefited principally from lower receivables and higher deferred revenue.
- Capital expenditures were $0.9 million for the first six months. Financing activities provided $0.1 million after approximately $40.7 million of borrowings and $40.6 million of repayments.
- Cash and cash equivalents were $2.7 million at June 30, 2023, compared with $1.9 million at December 31, 2022. Working capital was approximately $12.4 million, compared with $13.2 million at year-end.
- Total liabilities were $30.6 million and stockholders’ equity was $17.8 million at June 30, 2023. The accumulated deficit was $24.6 million.
- The Alterna credit facility had approximately $6.6 million outstanding at June 30, 2023, with a maximum capacity of $15 million and an effective borrowing rate of 10.1%. The facility matures on November 22, 2023, unless renewed or canceled under its terms.
- Inventory was $22.9 million, including $1.2 million of allowances for slow-moving, excess or obsolete inventory. Purchase commitments for inventory totaled approximately $13.4 million.
- No income tax expense or benefit was recorded. Net deferred tax assets were approximately $4.1 million, substantially offset by a valuation allowance of approximately $4.1 million.
Material changes versus the prior comparable period
- Revenue growth and improved production volumes raised gross margin by 13.2 percentage points in Q2 and 9.7 percentage points for the first six months.
- The operating loss narrowed by $2.9 million in Q2 and $5.4 million for the first six months.
- The net loss narrowed by $3.0 million in Q2 and $5.7 million for the first six months.
- Supply-chain conditions improved versus 2022, reducing material and freight pressures; however, the company expects to maintain elevated inventory levels because the future impact of shortages and lead times remains uncertain.
- The company fulfilled approximately 76% of the approximately 13,000 radio units in backlog at December 31, 2022. Backlog was approximately $24.0 million at June 30, 2023, compared with $27.0 million at December 31, 2022.
- The BKR 9000 achieved FCC P25 compliance testing and generated its first sales during the second quarter.
- On April 21, 2023, the company completed a one-for-five reverse stock split. The filing retroactively adjusts share and per-share information for all periods presented.
- On January 31, 2023, the company entered into an equity sales agreement allowing offerings of common stock of up to $15.0 million. The filing does not indicate material proceeds from this arrangement during the reported period.
Guidance, outlook, commentary and risks
Management did not provide formal quantitative revenue or earnings guidance. Management stated that demand remained strong, while noting that order timing, government budgets and appropriations, wildfire activity, supply-chain conditions and customer priorities can cause significant quarterly variability.
- Government agencies accounted for 46.2% of Q2 sales and 46.2% of six-month sales, creating concentration and budget-related risk.
- Supply shortages, extended component lead times, inflation, freight costs and geopolitical conditions could adversely affect production, margins, sales and cash flow.
- The company relies on its Alterna financing arrangement and believes available cash, anticipated operating cash flow and borrowing capacity are sufficient for foreseeable working-capital needs. Management also stated that future capital raises may be required or considered, but access to financing on acceptable terms is not assured.
- The company is developing the BKR Series and SaaS offerings, but the timing and market acceptance of new products remain uncertain.
- The investment in FG Holdings is noncontrolling, has no defined redemption frequency, and cannot be redeemed or transferred without manager consent. It generated a $0.4 million Q2 unrealized loss and a $0.5 million six-month unrealized loss.
- There were no pending material legal claims as of June 30, 2023. The company reported no material changes to previously disclosed risk factors and concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether the Alterna credit facility is renewed, refinanced or repaid when it matures in November 2023.
- Whether backlog conversion and new BKR Series products produce sustained revenue growth and improved profitability.
- Whether inventory levels, purchase commitments and component availability create future working-capital or obsolescence risks.
- Whether the company can achieve positive operating income and generate sufficient taxable income to realize its deferred tax assets.
- The company’s ongoing dependence on U.S. government customers and exposure to government budgets, appropriations and contract allocations.
- Potential dilution from the $15.0 million equity sales agreement, outstanding options and restricted stock units.
- Future valuation changes and liquidity restrictions associated with the FG Holdings investment.