BK Technologies(BKTI) - 2019 Q4 - Annual Report

PART I Item 1. Business The company designs, manufactures, and markets two-way land mobile radio communications equipment for government and industrial markets - BK Technologies Corporation is a holding company, with its operating subsidiary BK Technologies, Inc. providing two-way radio communications equipment[9] - The company designs, manufactures, and markets wireless communications products including two-way LMRs, repeaters, base stations, and related components, utilizing both analog and P-25 compliant digital technologies[10][11] - BK Radio-branded products target the government and public safety market, while RELM-branded products serve the business and industrial market[12][13] - On March 28, 2019, the company implemented a holding company reorganization to create a more efficient corporate structure and increase operational flexibility, with BK Technologies Corporation becoming the new parent company[16][19] - Significant orders received in 2019 and early 2020 include approximately $3.1 million from the U.S. Forest Service, $1.6 million from a California State customer, and a $1.8 million firm delivery order from the TSA, with an additional $2.1 million order from a California State customer and $2.8 million from the USFS announced in January/February 2020[21][23][24][25][27] - The company declared and paid four quarterly dividends of $0.02 per share in 2019 and declared another for April 2020, marking fifteen consecutive quarterly dividends[26] - The LMR industry is mature, with slowed growth due to factors like limited spectrum availability and constrained government budgets, leading to a migration towards more spectrum-efficient digital technologies like P-25[32][33] - The P-25 Compliance Assessment Program (CAP) validates the company's KNG and KNG2 Series digital radios for P-25 compliance and interoperability with competitors' infrastructure, which is crucial for federal, state, and local emergency response agencies[11][39][40] Sales by Market Segment (2018-2019) | Market Segment | 2019 Sales (% of Total) | 2018 Sales (% of Total) | | :--- | :--- | :--- | | Government and Public Safety | 93% | 95% | | Business and Industrial | 7% | 5% | Engineering and Development Expenses (2018-2019) | Year | Expenses (in millions) | | :--- | :--- | | 2019 | $9.8 | | 2018 | $7.8 | - The increase in R&D expenses was primarily due to the development of the new BKR Series, including multiband radios, expected to supplant the KNG and KNG2 series[44][46] - The company has no U.S. patents but relies on registered federal trademarks ('BK Technologies', 'BK Radio', 'Radios for Heroes') and trade secret laws[48][103] - Manufacturing strategy involves a hybrid of internal capabilities and outside contract arrangements, with approximately 64.0% of material and subassembly procurements in 2019 sourced from three suppliers, some of which are international[49][52] - Sales may fluctuate quarterly due to governmental customer spending patterns (fiscal year budgets) and increased demand from wildland fire-suppression efforts during the summer season[53] U.S. Government Sales (2018-2019) | Year | % of Total Sales | | :--- | :--- | | 2019 | 49% | | 2018 | 40% | Backlog of Unshipped Customer Orders (2018-2019) | As of December 31 | Backlog (in millions) | | :--- | :--- | | 2019 | $7.2 | | 2018 | $7.6 | - The company competes in a highly competitive industry dominated by Motorola Solutions, Inc., leveraging price, product quality, and customer responsiveness as competitive advantages[57][69] - The company is subject to various U.S. federal, state, local, and international laws and regulations, including FCC regulations for wireless communications products and U.S. Federal Government procurement regulations[58][59][60] Sales by Customer Location (2018-2019) | Customer Location | 2019 Sales (in millions) | 2018 Sales (in millions) | | :--- | :--- | :--- | | United States | $39.7 | $44.8 | | International | $0.4 | $4.6 | | Total | $40.1 | $49.4 | Item 1A. Risk Factors The company faces risks from product line dependency, intense competition, technological change, government sales reliance, and supply chain disruptions - The company is highly dependent on its LMR product line as its sole source of sales, and the success of new products like the BKR Series is critical[68] - The LMR industry is highly competitive, dominated by Motorola Solutions, Inc., which has significantly greater resources and a broader product range, including complete communication systems and infrastructure that BK Technologies does not provide[69] - Failure to keep pace with rapid technological changes, such as the transition from analog to digital LMR products and the adoption of the P-25 standard, could materially adversely affect the business[73] Reliance on U.S. Government Sales | Year | % of Total Sales to U.S. Government | | :--- | :--- | | 2019 | 49.1% | | 2018 | 40.0% | - The company's U.S. Government contracts are subject to strict procurement regulations, oversight audits, and potential termination, which could result in penalties or negative financial impacts[78][79] - Approximately 67.0% of material, subassembly, and product procurements in 2019 were sourced internationally, exposing the company to economic, political, and health risks in foreign countries, including potential disruptions from the coronavirus outbreak[81][84] - Carrying substantial inventory and inaccurate demand estimates could lead to markdowns and negatively impact financial results[86] - Fixed-price contracts carry risks of losses if cost estimates are incorrect or if there are unforeseen events like raw material price fluctuations or subcontractor issues[87] - The investment strategy, including holdings in public companies like PIH, is riskier than conservative investments and could adversely impact financial condition if not successful[88] - Fundamental Global Investors, LLC, as the largest stockholder (approx. 39%), can exert significant influence over company policies and affairs, potentially leading to interests that differ from other stockholders[89] - The company's brand and reputation are critical, and negative incidents, product issues, or legal violations could lead to lost sales and recruiting difficulties[91] - Challenging economic conditions could lead to deferred purchases by customers, increased financial pressures on third-party partners, and limited access to credit and capital for the company[92][93][94] - The credit agreement with JPMorgan Chase Bank, N.A. contains restrictive covenants, including a tangible net worth requirement, which could limit operating flexibility and lead to default if not met[96] - Dependence on a limited number of contract manufacturers and component suppliers (64.0% from three suppliers in 2019) creates risks of shortages, delays, and price increases[97][98] - Failure to effectively manage growth, including integrating new employees and improving operating systems, could materially and adversely affect the business[100] - The loss of executive officers or key personnel, or the inability to attract and retain qualified staff, is critical to the company's success[101][102] - The company's reliance on trademarks and trade secret laws, without U.S. patents, may make it difficult to protect intellectual property rights against infringement[103] - Rising healthcare costs could have a material adverse effect on the company's financial condition[104] - Insurance coverage may not fully cover all potential exposures, and disruptions in financial markets could impact insurer stability or increase premiums[106] - The company's stock price is vulnerable to significant fluctuations due to quarterly operating results, technological innovations, competition, and personnel changes[107] - Natural disasters, acts of war or terrorism, and other catastrophic events could cause operational disruptions, physical damage, and negatively impact financial condition[108] - Cybersecurity breaches or disruptions to information technology systems, including those of partners, could lead to data loss, operational disruptions, litigation, and reputational harm[110] - Noncompliance with U.S. and foreign laws and regulations, including those from the FCC and SEC, could result in penalties and reputational damage[113] - Failure to maintain NYSE American listing standards could lead to delisting, making it harder to trade common stock and access capital markets[115] - Infringement claims against the company could result in costly litigation, product redesigns, or licensing requirements, negatively impacting business and financial results[116] - The company has deferred tax assets that may not be fully utilized if future operating losses occur, potentially requiring a valuation allowance and additional non-cash income tax expense[117] - Compliance with Dodd-Frank conflict minerals disclosure requirements could affect sourcing, availability, and cost of minerals, potentially leading to reputational damage if conflict-free products are not obtainable[118] - As a holding company, BK Technologies Corporation relies on its subsidiaries' operations and funds, and restrictions on dividend payments from subsidiaries could impact its ability to meet obligations[120] - Future sales of substantial amounts of common stock, particularly by affiliates, could negatively affect the stock price and impair the ability to raise equity capital[121][122] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC - No unresolved staff comments[123] Item 2. Properties The company leases industrial and office space in Florida and Kansas and entered a new office lease in Sunrise, Florida, in February 2020 - The company leases approximately 54,000 square feet of industrial space in West Melbourne, Florida, with a lease term until June 30, 2027[124] - The company also leases 8,100 square feet of office space in Lawrence, Kansas, with the lease term extended until December 31, 2021[124] - In February 2020, a new lease for 6,857 square feet of office space in Sunrise, Florida, was entered into for 64 months, with annual rental expenses starting at approximately $196,000[125] Item 3. Legal Proceedings As of December 31, 2019, there were no pending material claims or legal matters - No pending material claims or legal matters as of December 31, 2019[126] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[127] PART II Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE American, with details on stockholders, dividends, and a stock repurchase program provided - Common stock trades on the NYSE American under the symbol 'BKTI'[132] - As of February 19, 2020, there were 645 holders of record of common stock[133] - The company currently pays quarterly cash dividends, funded by its wholly-owned subsidiary, BK Technologies, Inc., subject to credit agreement covenants[134][135] Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Shares Purchased | Average Price Paid Per Share ($) | Shares Purchased Under Publicly Announced Plans | Shares Remaining Under Publicly Announced Plans | | :--- | :--- | :--- | :--- | :--- | | 10/01/19-10/31/19 | 15,384 | 3.44 | 15,384 | 177,891 | | 11/01/19-11/30/19 | 15,569 | 3.18 | 15,569 | 162,322 | | 12/01/19-12/31/19 | 44,180 | 3.09 | 44,180 | 118,142 | | Total | 75,133 | 3.24 | 75,133 | | - The company has a stock repurchase program authorizing up to 1 million shares, with no termination date[137] Item 6. Selected Financial Data Selected financial data is not required for smaller reporting companies - Not required for smaller reporting companies[138] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Sales and operating results declined in 2019 due to lower volumes and increased R&D, with a focus on new product development for future growth Executive Summary Financial results declined in 2019, marked by an 18.8% decrease in sales and an operating loss, driven by lower public safety agency purchases - Financial and operating results for 2019 declined from 2018, with sales down 18.8% and an operating loss recognized[141] Key Financial Highlights (2018-2019) | Metric | 2019 (in millions) | 2018 (in millions) | | :--- | :--- | :--- | | Total Sales | $40.1 | $49.4 | | Gross Profit Margin | 39.0% | 40.5% | | SG&A Expenses | $20.0 | $17.6 | | Operating (Loss) Income | ($4.4) | $2.4 | | Pretax (Loss) Income | ($3.6) | ($0.5) | | Net Loss | ($2.6) | ($0.2) | | Cash Used in Operations | ($2.5) | $5.3 (provided) | - The decrease in sales was primarily due to reduced purchases from state and international public safety agencies in California and Canada, partially offset by new state and local agency sales[142][154] - Increased operating expenses were largely attributed to product development and engineering for the new BKR Series, including a multiband radio, which has experienced delays[141][149] - Working capital decreased to $14.5 million at year-end 2019 from $21.0 million in 2018, with cash, cash equivalents, and trade receivables declining[147] - The coronavirus outbreak in China has not impacted operations to date, but its potential future impact on the supply chain and ability to fulfill customer demand is uncertain[148][155] Results of Operations Sales fell 18.8% to $40.1 million and gross margin decreased to 39.0%, while SG&A expenses rose due to increased R&D for the BKR Series Consolidated Statements of Operations as a Percentage of Sales | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Sales | 100.0% | 100.0% | | Cost of products | (61.0)% | (59.5)% | | Gross margin | 39.0% | 40.5% | | Selling, general and administrative expenses | (50.0)% | (35.5)% | | Other income (expense), net | 1.9% | (6.0)% | | Loss before income taxes | (9.1)% | (1.0)% | | Income tax benefit | 2.5% | 0.6% | | Net loss | (6.6)% | (0.4)% | Sales, Net (2018-2019) | Year | Sales (in millions) | | :--- | :--- | | 2019 | $40.1 | | 2018 | $49.4 | - Sales decreased by $9.3 million (18.8%) in 2019, primarily due to non-recurring substantial purchases from state and international public safety agencies in California and Canada in prior years, and the federal government shutdown in Q1 2019[154] - Gross profit margin decreased to 39.0% in 2019 from 40.5% in 2018, mainly due to lower sales and manufacturing volumes, leading to suboptimal utilization of expenses, and a product mix weighted towards lower-margin products[158][159] Selling, General and Administrative (SG&A) Expenses (2018-2019) | Year | SG&A Expenses (in millions) | % of Sales | | :--- | :--- | :--- | | 2019 | $20.0 | 50.0% | | 2018 | $17.6 | 35.5% | - Engineering and product development expenses increased to $9.8 million (24.5% of sales) in 2019 from $7.8 million (15.7% of sales) in 2018, driven by the development of the new BKR Series, including multiband radios[162] - Marketing and selling expenses decreased slightly to $5.2 million in 2019, while general and administrative expenses increased to $5.0 million, primarily due to corporate headquarters costs and IT security upgrades[163][164] Operating (Loss) Income (2018-2019) | Year | Operating (Loss) Income (in millions) | % of Sales | | :--- | :--- | :--- | | 2019 | ($4.4) | (10.9)% | | 2018 | $2.4 | 4.9% | - The operating loss in 2019 was primarily due to lower sales combined with increased product development expenses[165] Other Income (Expense) Other income improved significantly due to an unrealized gain on an investment in securities, compared to a substantial loss in the prior year Other Income (Expense) (2018-2019) | Metric | 2019 (in thousands) | 2018 (in thousands) | | :--- | :--- | :--- | | Interest Income | $150 | $102 | | Gain (Loss) on Investment in Securities | $716 | ($2,671) | | Other Expense | ($104) | ($328) | | Total Other Income (Expense) | $762 | ($2,897) | - The company recognized an unrealized gain of $716,000 on its investment in PIH in 2019, a significant improvement from a $2.7 million loss in 2018[168] - Other expenses in 2018 were primarily attributed to exchange losses from a Canadian dollar-denominated contract[170] Income Tax Benefit The company recorded a non-cash income tax benefit resulting from deferred items, with net deferred tax assets totaling $4.4 million Income Tax Benefit (2018-2019) | Year | Income Tax Benefit (in thousands) | | :--- | :--- | | 2019 | $987 | | 2018 | $277 | - The income tax benefit for both years is largely non-cash, resulting from deferred items[145] - Net deferred tax assets totaled approximately $4.4 million as of December 31, 2019, primarily from R&D tax credits, operating loss carryforwards, and accrued expenses[173] - Management believes the company can generate sufficient taxable income to utilize the entire deferred tax asset, but future losses could necessitate additional valuation allowances[174][175] Liquidity and Capital Resources Cash and cash equivalents decreased by $6.6 million due to a net loss, inventory increases, dividends, and stock repurchases Net Cash Flow Summary (2018-2019) | Activity | 2019 (in millions) | 2018 (in millions) | | :--- | :--- | :--- | | Operating | ($2.5) | $5.3 | | Investing | ($2.5) | $3.2 | | Financing | ($1.7) | ($4.4) | | Net Change in Cash | ($6.6) | $4.1 | - Cash used in operating activities in 2019 was primarily due to a net loss, increased inventory, decreased accrued compensation, and an unrealized gain on investment, partially offset by decreased accounts receivable and increased deferred revenue[177][178] - Cash used in investing activities in 2019 was for property, plant, and equipment purchases, while 2018 included proceeds from securities sales[179] - Financing activities in 2019 included $1.0 million in quarterly dividends and $1.0 million in stock repurchases, partially offset by $0.4 million from a new equipment loan[180] - On January 30, 2020, the company entered into a new $5.0 million revolving line of credit with JPMorgan Chase Bank, N.A., collateralized by personal property and subject to restrictive covenants, including a $20.0 million tangible net worth requirement[184][186] Cash and Cash Equivalents (2018-2019) | As of December 31 | Amount (in millions) | | :--- | :--- | | 2019 | $4.7 | | 2018 | $11.3 | - The company believes current funds, anticipated cash from operations, and the new credit agreement are sufficient for foreseeable working capital needs[189] Off Balance Sheet Arrangements The company does not have any off-balance sheet arrangements - The company does not have any off-balance sheet arrangements[190] Recently Adopted Accounting Pronouncements The company adopted new accounting standards for revenue, financial instruments, and leases, with the lease standard having the most significant balance sheet impact - Adopted ASU 2014-09 (Revenue from Contracts with Customers) in Q1 2018 using the modified retrospective approach, with no material impact on financial statements[191] - Adopted ASU 2016-01 (Financial Instruments) in Q1 2018, resulting in a $4.3 million reclassification of unrealized gain on investment in securities to accumulated deficit[193] - Adopted ASU 2018-15 (Cloud Computing Arrangement Implementation Costs) in Q4 2018, with no material impact[194] - Adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing approximately $2.9 million in Right-of-Use (ROU) assets and $3.0 million in lease liabilities for operating leases[195] Recent Accounting Pronouncements No recent accounting pronouncements are expected to materially impact the company's financial condition or results of operations - No recent pronouncements are anticipated to have a material impact on the company's financial condition, results of operations, cash flows, or disclosures[196] Critical Accounting Policies and Estimates Key accounting policies involve significant estimates for revenue recognition, inventory and accounts receivable allowances, warranty costs, and income taxes - Critical accounting policies and estimates include revenue recognition, allowance for doubtful accounts, allowance for excess or obsolete inventory, allowance for product warranty, software development, and income taxes[197] - Revenue is recognized when control of promised goods or services is transferred to customers, typically upon shipment. Extended warranty revenue is deferred and recognized straight-line over the warranty period[199][200] Allowance for Doubtful Accounts (2018-2019) | As of December 31 | Allowance (in thousands) | Gross Trade Receivables (in millions) | | :--- | :--- | :--- | | 2019 | $50 | $4.0 | | 2018 | $50 | $5.8 | - The allowance for doubtful accounts is based on historical collection experience and a general allowance of approximately 1.3% of gross receivables, with no specific allowance as of December 31, 2019 and 2018[201] Allowance for Obsolete and Slow-Moving Inventory (2018-2019) | As of December 31 | Allowance (in thousands) | | :--- | :--- | | 2019 | $823 | | 2018 | $629 | - Inventory allowance is determined by classifying inventory usage, business forecasts, and individual management review to ensure valuation at the lower of cost or net realizable value[204] - A liability for estimated product warranty costs (two-year warranties) is recorded at the time of revenue recognition, based on historical experience and periodically assessed for adequacy[205] - Income taxes are accounted for using the asset and liability method, with deferred tax assets and liabilities recognized for temporary differences. Valuation allowances are provided if realization of deferred tax assets is not more likely than not, based on estimates of future earnings and tax planning strategies[206] Forward-Looking Statements The report contains forward-looking statements that involve risks and uncertainties, and readers are cautioned against placing undue reliance on them - The report contains forward-looking statements regarding future events and expectations, which involve risks and uncertainties that could cause actual results to differ materially[208] - Readers are cautioned not to place undue reliance on these statements, and the company assumes no obligation to publicly update or revise them[209] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Disclosures about market risk are not required for smaller reporting companies - Not required for smaller reporting companies[210] Item 8. Financial Statements and Supplementary Data This section includes the audited consolidated financial statements for 2019 and 2018, the independent auditor's report, and detailed notes - The consolidated financial statements for the years ended December 31, 2019 and 2018, have been audited by MSL, P.A., who issued an unqualified opinion[214][218] - The financial statements include Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Changes in Stockholders' Equity, and Consolidated Statements of Cash Flows[220][223][226][230] - Notes to the consolidated financial statements provide detailed information on significant accounting policies, inventories, allowance for doubtful accounts, property, plant and equipment, debt, investment in securities, leases, income taxes, loss per share, share-based employee compensation, significant customers, retirement plan, commitments and contingencies, and the capital program[233][286][287][288][291][303][307][317][333][334][346][347][348][354] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[359] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - The President and Chief Financial Officer concluded that disclosure controls and procedures were effective as of December 31, 2019[360] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[363] - No changes in internal control over financial reporting materially affected or are reasonably likely to materially affect internal control over financial reporting during the fourth fiscal quarter[364] Item 9B. Other Information There is no other information to report under this item - No other information[365] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, officers, and corporate governance is incorporated by reference from the 2020 proxy statement - Information on Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2020 definitive proxy statement[368][370] - The company has a Code of Business Conduct and Ethics and a Code of Ethics for the CEO and Senior Financial Officers, available on its website[371] Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from the 2020 proxy statement - Executive compensation information is incorporated by reference from the 2020 definitive proxy statement[372] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2020 proxy statement - Security ownership information is incorporated by reference from the 2020 definitive proxy statement[373] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 proxy statement - Information on related party transactions and director independence is incorporated by reference from the 2020 definitive proxy statement[374] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2020 proxy statement - Information on principal accounting fees and services is incorporated by reference from the 2020 definitive proxy statement[375] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and all exhibits filed with the report - The report includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Changes in Stockholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[378] - A comprehensive list of exhibits is provided, covering organizational documents, incentive compensation plans, employment agreements, credit agreements, and various certifications (e.g., XBRL, Section 302, Section 906)[380][381][383] - All financial statement schedules have been omitted as they are inapplicable, not material, or the information is included in the Consolidated Financial Statements and notes[386] Item 16. Form 10-K Summary This item is not applicable as no Form 10-K Summary is provided - No Form 10-K Summary is provided[387]