BK Technologies Corporation: FY2022 Form 10-K Summary
Business context and reporting period
BK Technologies Corporation, through its operating subsidiary, designs, manufactures and markets public-safety-grade two-way land mobile radios, primarily for government, public safety, military and industrial customers. The Company also develops public-safety smartphone and push-to-talk-over-cellular software. The filing covers the fiscal year ended December 31, 2022, with comparison to fiscal 2021; it is an annual report rather than a quarterly filing.
Sales are concentrated in government and public safety markets. U.S. Government sales represented approximately 38% of total sales in 2022, compared with 36% in 2021. The Company had 148 employees at year-end and operates primarily from Florida.
Key financial metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $50.951 million | $45.364 million | Up 12.3% |
| Gross profit margin | 19.3% | 35.8% | Down 16.5 percentage points |
| SG&A expense | $20.925 million | $17.457 million | Up $3.468 million |
| Operating loss | $11.081 million | $1.196 million | Loss increased $9.885 million |
| Net loss | $11.633 million | $1.701 million | Loss increased $9.932 million |
| Basic and diluted loss per share | $0.69 loss | $0.11 loss | Loss increased $0.58 per share |
| Cash used in operating activities | $9.000 million | $6.302 million | Use increased $2.698 million |
| Capital expenditures | $1.750 million | $2.416 million | Down $0.666 million |
| Cash and cash equivalents | $1.918 million | $10.580 million | Down $8.662 million |
Engineering, research and development expense was approximately $9.6 million in 2022, compared with $8.2 million in 2021. The Company recorded a $900,000 one-time, non-cash write-off related to BKR product development materials and inventory, including a $646,000 engineering write-off and a $254,000 cost-of-products charge.
Working capital was approximately $13.2 million at December 31, 2022, compared with $25.2 million at year-end 2021. Current assets were $36.217 million and current liabilities were $22.970 million. Year-end total assets were $48.832 million and stockholders’ equity was $20.135 million.
Debt, liquidity and capital allocation
- In November 2022, the Company replaced its JPMorgan credit facility with an Alterna Capital Solutions Invoice Purchase and Security Agreement. The facility has maximum funding capacity of $15 million, matures in November 2023 and bears interest at Prime plus 1.85%.
- Borrowings under the Alterna facility were approximately $5.9 million at December 31, 2022. The facility is secured by accounts receivable, inventory and other personal property, and includes customary covenants and events of default.
- Equipment notes payable totaled approximately $606,000 at year-end, including $277,000 due in 2023.
- Net cash provided by financing activities was $2.088 million in 2022, compared with $12.400 million in 2021. Financing proceeds included approximately $9.7 million from the Alterna facility, partially offset by debt repayments and $2.0 million of dividends paid.
- The Company declared three quarterly dividends of $0.03 per share in 2022. It did not repurchase shares under its authorized $5 million repurchase program.
- Management believes existing cash, anticipated operating cash flow and borrowing availability will satisfy working-capital needs for the foreseeable future, but the Company continued to report operating losses and negative operating cash flow.
Material changes versus the prior comparable period
- Revenue increased by $5.6 million, driven primarily by state and local public-safety agencies and the first BKR-series radio, but supply-chain constraints prevented the Company from converting substantial orders into shipments.
- Backlog increased to approximately $27.0 million at year-end 2022 from $13.1 million at year-end 2021. Management expected to fulfill many backlog orders during the first half of 2023.
- Gross margin declined sharply because of higher material, component and freight costs, product mix and a one-time BKR inventory adjustment.
- SG&A increased 19.9%, reflecting higher engineering, product-development, corporate management and headquarters costs.
- Inventory increased to $22.105 million from $16.978 million, while trade receivables increased to $10.616 million from $8.229 million. Accounts payable increased to $12.898 million from $5.883 million, principally because of purchase timing and extended supplier lead times.
- Other expense increased to $552,000 from $318,000, including a $313,000 loss on the Company’s investment associated with FG Financial Group.
- The Company recognized no income tax expense in 2022. Net deferred tax assets were $4.116 million after a $3.356 million valuation allowance, reflecting uncertainty about future taxable income.
Guidance, outlook, risks and unusual items
Management did not provide quantitative revenue or earnings guidance. Management described customer demand, order activity, backlog and the sales funnel as strong, while cautioning that shipment timing remains uncertain because of component shortages, labor constraints, inflation, freight costs and geopolitical conditions.
- The Company expects to launch its InteropONE public-safety push-to-talk-over-cellular service in the first quarter of 2023. The all-band BKR9000 portable radio was scheduled for release in 2023.
- Supply-chain disruptions, particularly involving semiconductors and integrated circuits, materially constrained production during the first half of 2022 and may continue for several quarters or years.
- The Company relies on a limited supplier base: approximately 61% of 2022 material, subassembly and product procurements came from nine suppliers, and certain components have single-source dependencies.
- Key risks include dependence on LMR products, intense competition from larger suppliers including Motorola Solutions, reliance on U.S. Government sales, government budget and contracting risks, product-transition execution, inventory obsolescence, cybersecurity, foreign sourcing, inflation, geopolitical conflict and access to capital.
- The Company had approximately $12.814 million of inventory purchase commitments at December 31, 2022.
- No material legal proceedings were pending at year-end. The independent auditor issued an unqualified opinion on the consolidated financial statements, but identified inventory valuation and deferred-tax-asset realizability as critical audit matters.
- On January 31, 2023, the Company entered into a sales agreement allowing issuance of up to 4,225,352 common shares for aggregate gross proceeds of up to $15 million. Proceeds may be used for working capital, capital expenditures, operations, strategic investments and potential acquisitions.
Most important facts for investors to verify
- Whether the $27.0 million backlog converts into shipments and cash collections as anticipated, particularly during the first half of 2023.
- Whether gross margins recover from 19.3% as supply-chain, freight and component costs normalize.
- The Company’s ability to fund continuing operating losses and negative operating cash flow with only $1.918 million of cash at year-end and reliance on the Alterna facility.
- The November 2023 maturity or renewal of the Alterna facility, including borrowing-base availability, interest costs and covenant compliance.
- Execution and market acceptance of the BKR9000 radio, the broader BKR product transition and the InteropONE SaaS launch.
- The potential dilution and capital impact of the January 2023 at-the-market sales agreement.
- The realizability of the $4.116 million net deferred tax asset and the possibility of additional valuation allowances if losses continue.
- Exposure to government procurement decisions, supplier concentration, inventory obsolescence and the Company’s continuing dependence on LMR products.