BK Technologies(BKTI) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Unaudited condensed consolidated financial statements for H1 2020 reflect decreased assets and equity, a $1.5 million net loss, and positive operating cash flow Condensed Consolidated Balance Sheets Total assets decreased to $34.6 million by June 30, 2020, driven by a $4.0 million inventory reduction, with liabilities and stockholders' equity also declining Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $21,457 | $23,886 | | Inventories, net | $9,527 | $13,513 | | Total Assets | $34,610 | $37,940 | | Total Current Liabilities | $8,011 | $9,376 | | Total Liabilities | $13,450 | $14,664 | | Total Stockholders' Equity | $21,160 | $23,276 | Condensed Consolidated Statements of Operations Net sales for Q2 2020 decreased to $9.9 million, resulting in a $302,000 net loss; H1 2020 net sales were flat at $20.8 million with a $1.5 million net loss Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | Six Months 2020 (in thousands) | Six Months 2019 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Sales, net | $9,937 | $13,294 | $20,826 | $20,938 | | Operating (loss) income | ($36) | $20 | ($884) | ($2,298) | | Net loss | ($302) | ($247) | ($1,494) | ($1,565) | | Net loss per share | ($0.02) | ($0.02) | ($0.12) | ($0.12) | Condensed Consolidated Statements of Cash Flows H1 2020 operating cash flow was $3.6 million, a significant improvement driven by a $3.9 million inventory decrease, with cash and equivalents increasing to $6.9 million Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $3,597 | ($1,333) | | Net cash used in investing activities | ($525) | ($1,462) | | Net cash used in financing activities | ($809) | ($1,058) | | Net change in cash and cash equivalents | $2,263 | ($3,853) | | Cash and cash equivalents, end of period | $6,939 | $7,415 | Notes to Condensed Consolidated Financial Statements Notes detail COVID-19 impacts, including an 18% workforce reduction and PPP loan repayment, significant sales to U.S. government agencies, and an unrealized investment loss - In response to the COVID-19 pandemic, the company implemented an approximately 18% workforce reduction in May 2020, incurring about $221,000 in severance costs[31] - The company received a $2.2 million loan under the Paycheck Protection Program (PPP) in April 2020 but repaid it in full the same month due to uncertainty regarding qualification requirements[32] - Sales to U.S. government agencies accounted for 43.0% of net sales in Q2 2020 and 52.1% for the first six months of 2020[62] - The company recognized a six-month unrealized loss of approximately $506,000 on its investment in 1347 Property Insurance Holdings, Inc. (PIH), compared to a $444,000 gain in the prior year period[45] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses H1 2020 financial results, highlighting COVID-19 impacts, cost-saving measures, improved gross margins, reduced SG&A, and positive operating cash flow Impact of COVID-19 Pandemic As an essential business, the company maintained operations while implementing cost reductions, including an 18% workforce reduction and repaying a $2.2 million PPP loan - The company is considered an "essential business" and has kept manufacturing operations open during the pandemic[89] - In May 2020, the company reduced its workforce by approximately 18% to lower costs, resulting in severance charges of about $221,000[91] - The company's stock repurchase program terminated in April 2020 and was not renewed[92] Results of Operations H1 2020 sales were flat at $20.8 million, with gross margin improving to 39.5% and SG&A decreasing to $9.1 million, resulting in a reduced operating loss Key Operational Metrics Comparison (in millions, except for percentages) | Metric | H1 2020 (in millions) | H1 2019 (in millions) | | :--- | :--- | :--- | | Net Sales | $20.8 | $20.9 | | Gross Profit Margin | 39.5% | 38.9% | | SG&A Expenses | $9.1 | $10.4 | | Operating Loss | ($0.884) | ($2.3) | - Engineering and product development expenses for H1 2020 decreased to $4.1 million from $5.2 million in H1 2019 as development activities for the new BKR Series shifted to the internal engineering team[116] - The company anticipates its new BKR Series product line will be available for sale in the second half of 2020, which is expected to increase its addressable market[108] Liquidity and Capital Resources Liquidity improved with H1 2020 operating cash flow of $3.6 million, driven by inventory reduction, and a $5.0 million revolving credit line secured - Net cash provided by operating activities was $3.6 million for H1 2020, mainly due to a decrease in inventory of $3.9 million[130][131] - In H1 2020, the company paid $502,000 in dividends and repurchased $269,000 of its common stock; the repurchase program ended in April 2020[134] - In January 2020, the company entered into a $5.0 million credit agreement with JPMC, with approximately $3.9 million available as of June 30, 2020, and no outstanding borrowings[138][142] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting during Q2 2020 - The President and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[148] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[149] PART II - OTHER INFORMATION Item 1A. Risk Factors Updated risk factors highlight the COVID-19 pandemic's material adverse impact on business, including workforce disruptions, supply chain delays, and reduced customer spending - The COVID-19 pandemic is expected to have a material adverse impact on business and financial performance, with the full extent dependent on future developments like the pandemic's duration and severity[154] - Risks include potential disruptions to the supply chain, manufacturing, and product shipments, as well as the possibility of customers reducing or delaying orders due to budget constraints or economic uncertainty[156][158] - The company has taken steps to reduce expenses, including a workforce reduction of approximately 18%, but there is no certainty these measures will be sufficient to mitigate all risks posed by the pandemic[156] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 16,129 shares in April 2020 before terminating its stock repurchase program, with credit agreement covenants potentially limiting subsidiary dividends Issuer Purchases of Equity Securities (Q2 2020) | Period | Total Shares Purchased (shares) | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | April 2020 | 16,129 | $1.63 | | May 2020 | 0 | $0 | | June 2020 | 0 | $0 | - The company's stock repurchase program terminated in April 2020 and was not renewed[162] Item 5. Other Information The company entered a consulting agreement with Itasca Financial LLC for strategic advice, involving a retainer and monthly fees, with related party disclosures - The company entered into a consulting agreement with Itasca Financial LLC on June 24, 2020, for strategic advice, involving a $50,000 retainer and a $20,000 monthly fee; the agreement has since been suspended indefinitely[164] Item 6. Exhibits This section indexes exhibits filed with the Form 10-Q, including corporate governance documents, the new consulting agreement, and officer certifications - The Exhibit Index lists all documents filed with the report, including certifications required by the Sarbanes-Oxley Act and XBRL data files[168][170]