Notes to Condensed Consolidated Financial Statements
Unaudited
(In thousands, except share and per share data and percentages or as otherwise noted)
1. Condensed Consolidated Financial Statements
Basis of Presentation
The condensed consolidated balance sheet as of September 30, 2022, the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021, have been prepared by BK Technologies Corporation (the “Company,” “we,” “us,” “our”), and are unaudited. The condensed consolidated balance sheet at December 31, 2021, has been derived from the Company’s audited consolidated financial statements at that date.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission (“SEC”) on March 17, 2022, as amended by filing Form 10-K/A with the SEC on April 29, 2022. The results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of the operating results for a full year.
Principles of Consolidation
The accounts of the Company and its subsidiaries have been included in the accompanying condensed consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company consolidates entities in which it has a controlling financial interest. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a variable interest entity (“VIE”) or a voting interest entity.
VIEs are entities in which (i) the total equity investment at risk is not sufficient to enable the entity to finance its activities independently, or (ii) the at-risk equity holders do not have the normal characteristics of a controlling financial interest. A controlling financial interest in a VIE is present when an enterprise has one or more variable interests that have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The enterprise with a controlling financial interest is the primary beneficiary and consolidates the VIE.
Voting interest entities lack one or more of the characteristics of a VIE. The usual condition for a controlling financial interest is ownership of a majority voting interest for a corporation or a majority of kick-out or participating rights for a limited partnership.
When the Company does not have a controlling financial interest in an entity but exerts significant influence over the entity’s operating and financial policies (generally defined as owning a voting or economic interest of between 20% to 50%), the Company’s investment is accounted for under the equity method of accounting. If the Company does not have a controlling financial interest in, or exert significant influence over, an entity, the Company accounts for its investment at fair value, if the fair value option was elected, or at cost.
Through September 30, 2022 the Company was the sole limited partner in FGI 1347 Holdings, LP, ("1347 LP"), a consolidated VIE. As disclosed in Note 6, the Company ceased to be the limited partner of 1347 LP as of September 30, 2022.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, trade accounts receivable, investments, accounts payable, accrued expenses, notes payable, credit facilities, and other liabilities. As of September 30, 2022, and December 31, 2021, the carrying amount of cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses, notes payable, and other liabilities approximated their respective fair value due to the short-term nature and maturity of these instruments.
Through September 14, 2022, the Company held an investment in common stock of FG Financial Group, Inc. made via 1347 LP. The Company used observable market data assumptions (Level 1 inputs, as defined in accounting guidance) that it believes market participants would use in pricing its investment in FGF Financial Group Inc.
Effective September 14,2022, the Company has an investment in Series B Common interests of FG Financial Holdings, LLC (“FG Holdings”). As further discussed in Note 6, the Company records the investment according to guidance provided by ASC 820 “Fair Value Measurement”, as the Company does not have a controlling financial interest in, nor exerts significant influence over he activities of FG Holdings. The investment in Series B common interests of FG Holdings is reported using net asset value (“NAV”) of interests held by the Company at period-end. The NAV is calculated using the fair value of the underlying stock of FGF held by FG Holdings, plus uninvested cash, less liabilities, further adjusted through allocations based on distribution preferences, as defined in the operating agreement of FG Holdings. The NAV is used as a practical expedient and has not been classified within the fair value hierarchy.
Liquidity
The Company incurred operating losses and reported negative cash flows from operations during 2022 and 2021. The Company’s operating results have been negatively impacted by the worldwide shortages of materials, in particular semiconductors and integrated circuits, extended lead times, and increased costs and inventory levels for certain components. The Company's current credit facility expires on January 31, 2023. The Company is in the process of negotiating a new credit facility (see Note 13). Management believes that cash and cash equivalents currently available, combined with anticipated cash to be generated from operations, and borrowing ability are sufficient to meet the Company’s working capital requirements in the foreseeable future. The Company generally relies on cash from operations, commercial debt, and equity offerings, to the extent available, to satisfy its liquidity needs and to meet its payment obligations The Company may engage in public or private offerings of equity or debt securities to maintain or increase its liquidity and capital resources (see Note 13). However, financial and economic conditions, including those resulting from the COVID-19 pandemic and the current geopolitical tension, could impact our ability to raise capital or debt financing, if needed, on acceptable terms or at all.
Recent Accounting Pronouncements
The Company does not discuss recent pronouncements that are not anticipated to have a material impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
Change in Accounting Principle
As disclosed in Note 4, on July 1, 2021, the Company changed its accounting for inventory to burden the material at the time of purchase receipts. Prior to July 1, 2021, the Company applied the material burden at the time the inventory was issued to work in progress.
2. Significant Events and Transactions
Pursuant to the Company’s capital return program, the Company’s Board of Directors declared a quarterly dividend of $0.03 per share of the Company’s common stock on September 30, 2022, to stockholders of record as of October 25, 2022. These dividends will be paid on November 8, 2022
On June 30, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.03 per share of the Company’s common stock to stockholders of record as of July 25, 2022. These dividends were paid on August 8, 2022.
On April 6, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.03 per share of the Company’s common stock to stockholders of record as of May 2, 2022. These dividends were paid on May 16, 2022.
3. Allowance for Doubtful Accounts
The allowance for doubtful accounts on trade receivables was approximately $50 on gross trade receivables of $5,429 and $8,279 at September 30, 2022 and December 31, 2021, respectively. This allowance is used to state trade receivables at a net realizable value or the amount that the Company estimates will be collected of the Company’s gross trade receivables.
4. Inventories, Net
On July 1, 2021, the Company changed its accounting for inventory to burden the material at the time of purchase receipts. Prior to July 1, 2021, the Company applied the material burden at the time the inventory was issued to work in progress. The Company believes that this method improves financial reporting by better reflecting the current value of inventory on the consolidated balance sheets, by providing better matching of revenues and expenses. The fiscal 2020 financial statements have been retrospectively adjusted to apply the new inventory change. The cumulative effect of this change on periods prior to those presented herein resulted in a net increase in inventory and a net decrease in accumulated deficit of approximately $1,104 as of December 31, 2020.
Inventories, which are presented net of allowance for slow moving, excess, or obsolete inventory, consisted of the following:
| | September 30, 2022 | | | December 31, 2021 | |
Finished goods | | $ | 3,830 | | | $ | 2,335 | |
Work in process | | | 8,635 | | | | 4,527 | |
Raw materials | | | 13,867 | | | | 10,116 | |
| | $ | 26,332 | | | $ | 16,978 | |
Allowances for slow-moving, excess, or obsolete inventory are used to state the Company’s inventories at the lower of cost or net realizable value. The allowances were approximately $1,214 at September 30, 2022, compared with approximately $1,288 at December 31, 2021.
5. Income Taxes
The Company has recorded no tax expense or benefit for the three and nine months ended September 30, 2022, compared with an income tax expense of $0 and $184 for the same periods last year.
The Company’s income tax provision is based on management’s estimate of the effective tax rate for the full year. The tax provision (benefit) in any period will be affected by, among other things, permanent, as well as temporary, differences in the deductibility of certain items, changes in the valuation allowance related to net deferred tax assets, in addition to changes in tax legislation. As a result, the Company may experience significant fluctuations in the effective book tax rate (that is, tax expense divided by pre-tax book income) from period to period.
As of September 30, 2022, the Company’s net deferred tax assets totaled approximately $4,116 and were primarily derived from research and development tax credits, deferred revenue, and net operating loss carryforwards.
In order to fully utilize the net deferred tax assets, the Company will need to generate sufficient taxable income in future years. The Company analyzed all positive and negative evidence to determine if, based on the weight of available evidence, it is more likely than not to realize the benefit of the net deferred tax assets. The recognition of the net deferred tax assets and related tax benefits is based upon the Company’s conclusions regarding, among other considerations, estimates of future earnings based on information currently available and current and anticipated customers, contracts, and product introductions, as well as historical operating results and certain tax planning strategies.
Based on the analysis of all available evidence, both positive and negative, the Company has concluded that it does not have the ability to generate sufficient taxable income in the necessary period to utilize the entire benefit for the deferred tax assets. Accordingly, the Company established a valuation allowance of $2,989 and $610 as of September 30, 2022 and December 31, 2021, respectively. The Company cannot presently estimate what, if any, changes to the valuation of its deferred tax assets may be deemed appropriate in the future. If the Company incurs future losses, it may be necessary to record additional valuation allowance related to the deferred tax assets recognized as of September 30, 2022.
6. Investments
The Company held an investment in a limited partnership, FGI 1347 Holdings' LP (“1347 LP”), of which the Company was the sole limited partner. 1347 LP, was established for the purpose of investing in securities, and its sole primary asset was shares of FG Financial Group, Inc. (Nasdaq: FGF) (“FGF”). These shares were purchased in March and May 2018 for approximately $3,741.
Affiliates of Fundamental Global GP, LLC (“FG”), a significant stockholder of the Company, served as the general partner and the investment manager of 1347 LP, and the Company was the sole limited partner. As the sole limited partner, the Company was entitled to 100% of net assets held by 1347 LP. FG has not received any management fees or performance fees or expense reimbursement for its services to the limited partnership arising in connection with 1347 LP’s operations, as provided by the partnership agreement, upon approval by the Company’s Board of Directors.
The Company accounted for the investment in FGF, made through 1347 LP, as a consolidated VIE. VIEs are entities in which (i) the total equity investment at risk is not sufficient to enable the entity to finance its activities independently, or (ii) the at-risk equity holders do not have the normal characteristics of a controlling financial interest. A controlling financial interest in a VIE is present when an enterprise has one or more variable interests that have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The enterprise with a controlling financial interest is the primary beneficiary and consolidates the VIE.
On September 14, 2022, FG contributed all of the shares of FGF held by 1347 LP to FG Holdings, with an approximate value of $945, based on the published price of FGF stock, in exchange for Series B Common Interests of FG Holdings, with an equivalent value. The Company recognized a gain of $76, and a loss of $850 for the three and nine months ended September 30, 2022. FG Holdings structure provides for preferred A interests, which accrue preferred return of eight percent per annum, and also receive an additional 20% of any positive profits of FG Holdings, as defined.
The investment in the Series B common interests of FG Holdings is measured using the NAV practical expedient in accordance with ASC 820 Fair Value Measurement and has not been classified within the fair value hierarchy. FG Holdings invests in common and preferred stock of FGF (specific company/growth objective). FG Holdings structure provides for Series A preferred interests, which accrue return of eight percent per annum and receive 20% of positive profits with respect to the total return in the capital provided by the holders of Series A preferred interests. There is no defined redemption frequency, and the Company cannot redeem or transfer its investment without a prior written consent of FG Holdings managers, who are FG affiliates. Distributions may be made to members at such times and amounts as determined by the managers, and shall be based on the most recent NAV. The Company does not have any unfunded commitments related to this investment.
On September 30, 2022, Series B Common Interests of FG Holdings were distributed in-kind to the Company as the sole limited partner of 1347 LP, and the Company consented to withdraw from 1347 LP, as the limited partner. As a result, the Company recognized a loss on deconsolidation of 1347 LP of approximately $43.
As of September 30, 2022, the members and affiliates of FG Holdings, beneficially owned in the aggregate 5,640,467shares of FGF’s common stock, representing approximately 60.3% of FGF’s outstanding shares. Additionally, FG and its affiliates constitute the largest stockholder of the Company. Mr. Kyle Cerminara, Chairman of the Company’s Board of Directors, is Chief Executive Officer, Co-Founder and Partner of FG and serves as Chairman of the Board of Directors of Ballantyne Strong, Inc. , a manager and majority Series B member in FG Holdings. Mr. Cerminara also serves as Chairman of the Board of Directors of FGF.
7. Stockholders’ Equity
The changes in condensed consolidated stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, are as follows:
| | Common Stock Shares | | | Common Stock Amount | | | Additional Paid-In Capital | | | Accumulated Deficit | | | Treasury Stock | | | Total | |
Balance at December 31, 2021 | | | 18,298,999 | | | $ | 10,979 | | | $ | 35,862 | | | $ | (8,821 | ) | | $ | (5,402 | ) | | $ | 32,618 | |
Common stock issued under restricted stock units | | | 16,000 | | | | 10 | | | | (10 | ) | | | — | | | | — | | | | — | |
Share-based compensation expense-stock options | | | — | | | | — | | | | 85 | | | | — | | | | — | | | | 85 | |
Share-based compensation expense-restricted stock units | | | — | | | | — | | | | 70 | | | | — | | | | — | | | | 70 | |
Net loss | | | — | | | | — | | | | — | | | | (3,936 | ) | | | — | | | | (3,936 | ) |
Balance at March 31, 2022 | | | 18,314,999 | | | | 10,989 | | | | 36,007 | | | | (12,757 | ) | | | (5,402 | ) | | | 28,837 | |
Common stock issued under restricted stock units | | | 53,864 | | | | 32 | | | | (32 | ) | | | — | | | | — | | | | — | |
Share-based compensation expense-stock options | | | — | | | | — | | | | 51 | | | | — | | | | — | | | | 51 | |
Share-based compensation expense-restricted stock units | | | — | | | | — | | | | 171 | | | | — | | | | — | | | | 171 | |
Common stock dividends ($0.03 per share) | | | — | | | | — | | | | — | | | | (1,014 | ) | | | — | | | | (1,015 | ) |
Net loss | | | — | | | | — | | | | — | | | | (4,334 | ) | | | — | | | | (4,334 | ) |
Balance at June 30, 2022 | | | 18,368,863 | | | | 11,021 | | | | 36,197 | | | | (18,105 | ) | | | (5,402 | ) | | | 23,711 | |
Common stock issued under restricted stock units | | | 65,834 | | | | 40 | | | | (40 | ) | | | — | | | | — | | | | — | |
Share-based compensation expense-stock options | | | — | | | | — | | | | 69 | | | | — | | | | — | | | | 69 | |
Share-based compensation expense-restricted stock units | | | — | | | | — | | | | 126 | | | | — | | | | — | | | | 126 | |
Common stock dividends ($0.03 per share) | | | — | | | | — | | | | — | | | | (511 | ) | | | — | | | | (511 | ) |
Net loss | | | — | | | | — | | | | — | | | | (2,402 | ) | | | — | | | | (2,402 | ) |
Balance at September 30, 2022 | | | 18,434,697 | | | $ | 11,061 | | | $ | 36,352 | | | $ | (21,018 | ) | | $ | (5,402 | ) | | $ | 20,993 | |
| | Common Stock Shares | | | Common Stock Amount | | | Additional Paid-In Capital | | | Accumulated Deficit | | | Treasury Stock | | | Total | |
Balance at December 31, 2020* | | | 13,962,366 | | | $ | 8,377 | | | $ | 26,346 | | | $ | (5,693 | ) | | $ | (5,402 | ) | | $ | 23,628 | |
Common stock issued under restricted stock units | | | 24,505 | | | | 15 | | | | (15 | ) | | | — | | | | — | | | | — | |
Share-based compensation expense-stock options | | | — | | | | — | | | | 32 | | | | — | | | | — | | | | 32 | |
Share-based compensation expense-restricted stock units | | | — | | | | — | | | | 103 | | | | — | | | | — | | | | 103 | |
Common stock dividends ($0.02 per share) | | | — | | | | — | | | | — | | | | (251 | ) | | | — | | | | (251 | ) |
Net loss* | | | — | | | | — | | | | — | | | | (670 | ) | | | — | | | | (670 | ) |
Balance at March 31, 2021* | | | 13,986,871 | | | | 8,392 | | | | 26,466 | | | | (6,614 | ) | | | (5,402 | ) | | | 22,842 | |
Common stock issued, net of issuance costs | | | 4,249,250 | | | | 2,549 | | | | 9,010 | | | | — | | | | — | | | | 11,559 | |
Share-based compensation expense-stock options | | | — | | | | — | | | | 33 | | | | — | | | | — | | | | 33 | |
Share-based compensation expense-restricted stock units | | | — | | | | — | | | | 25 | | | | — | | | | — | | | | 25 | |
Net income* | | | — | | | | — | | | | — | | | | 1,838 | | | | — | | | | 1,838 | |
Balance at June 30, 2021* | | | 18,236,121 | | | | 10,941 | | | | 35,534 | | | | (4,776 | ) | | | (5,402 | ) | | | 36,297 | |
Common stock issued under restricted stock units | | | 28,615 | | | | 17 | | | | (17 | ) | | | — | | | | — | | | | — | |
Share-based compensation expense-stock options | | | — | | | | — | | | | 150 | | | | — | | | | — | | | | 150 | |
Share-based compensation expense-restricted stock units | | | — | | | | — | | | | 34 | | | | — | | | | — | | | | 34 | |
Common stock dividends ($0.02 per share) | | | — | | | | — | | | | — | | | | (671 | ) | | | — | | | | (671 | ) |
Net loss | | | — | | | | — | | | | — | | | | (2,566 | ) | | | — | | | | (2,566 | ) |
Balance at September 30, 2021 | | | 18,264,736 | | | $ | 10,958 | | | $ | 35,701 | | | $ | (8,013 | ) | | $ | (5,402 | ) | | $ | 33,244 | |
*The balances as of December 31, 2020, March 31, 2021, and June 30, 2021 and the amounts for the three months ended March 31, 2021 and June 30, 2021, have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 4 of the Condensed Consolidated Financial Statements.
8. Loss Per Share
The following table sets forth the computation of basic and diluted loss per share:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, 2022 | | | September 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | |
Numerator: | | | | | | | | | | | | |
Net loss for basic and diluted earnings per share | | $ | (2,402 | ) | | $ | (2,566 | ) | | $ | (10,672 | ) | | $ | (1,398 | ) |
Denominator for basic loss per share weighted average shares | | | 16,950,486 | | | | 16,795,356 | | | | 16,889,554 | | | | 14,307,847 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Options and restricted stock units | | | — | | | | — | | | | — | | | | — | |
Denominator for diluted loss per share weighted average shares | | | 16,950,486 | | | | 16,795,356 | | | | 16,889,554 | | | | 14,307,847 | |
Basic loss per share | | $ | (0.14 | ) | | $ | 0.15 | ) | | $ | (0.63 | ) | | $ | (0.10 | ) |
Diluted loss per share | | $ | (0.14 | ) | | $ | (0.15 | ) | | $ | (0.63 | ) | | $ | (0.10 | ) |
Approximately 1,101,500 stock options and 205,644 restricted stock units for the three and nine months ended September 30, 2022, respectively, and 681,500 stock options and 171,316 restricted stock units for the three and nine months ended September 30, 2021, respectively, were excluded from the calculation because they were anti-dilutive.
9. Non-Cash Share-Based Employee Compensation
The Company has an employee and non-employee director share-based incentive compensation plan. Related to these programs, the Company recorded non-cash share-based employee compensation expense of $69 and $205 for the three and nine months ended September 30, 2022, respectively, compared with $150 and $215, for the same periods last year. The Company considers its non-cash share-based employee compensation expenses as a component of cost of products and selling, general and administrative expenses. There was no non-cash share-based employee compensation expense capitalized as part of capital expenditures or inventory for the periods presented.
The Company uses the Black-Scholes-Merton option valuation model to calculate the fair value of stock option grants under this plan. The non-cash share-based employee compensation expense recorded in the three and nine months ended September 30, 2022, was calculated using certain assumptions. Such assumptions are described more comprehensively in Note 10 (Share-Based Employee Compensation) of the Notes to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
A summary of activity under the Company’s stock option plans during the nine months ended September 30, 2022, is presented below:
| | Stock Options | | | Wgt. Avg. Exercise Price ($) Per Share | | | Wgt. Avg. Remaining Contractual Life (Years) | | | Wgt. Avg. Grant Date Fair Value ($) Per Share | | | Aggregate Intrinsic Value ($) | |
As of January 1, 2022 | | | | | | | | | | | | | | | |
Outstanding | | | 676,500 | | | | 3.68 | | | | 7.33 | | | | 1.41 | | | | 4,500 | |
Vested | | | 361,600 | | | | 3.80 | | | | 6.66 | | | | 1.44 | | | | 4,500 | |
Nonvested | | | 314,900 | | | | 3.53 | | | | 8.10 | | | | 1.39 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Period activity | | | | | | | | | | | | | | | | | | | | |
Issued | | | 430,000 | | | | 2.41 | | | | — | | | | 0.80 | | | | — | |
Exercised | | | — | | | | — | | | | — | | | | — | | | | — | |
Forfeited | | | — | | | | — | | | | — | | | | — | | | | — | |
Expired | | | 5,000 | | | | 4.95 | | | | — | | | | 1.05 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
As of September 30, 2022 | | | | | | | | | | | | | | | | | | | | |
Outstanding | | | 1,101,500 | | | | 3.18 | | | | 7.78 | | | | 1.18 | | | | 19,375 | |
Vested | | | 516,233 | | | | 3.64 | | | | 6.50 | | | | 1.37 | | | | 9,167 | |
Nonvested | | | 585,267 | | | | 2.77 | | | | 8.92 | | | | 1.00 | | | | 10,208 | |
Restricted Stock Units
On September 30, 2022, the Company granted 9,600 restricted stock units to Joshua Horowitz for strategic advisory service compensation. These restricted stock units were fully vested and settled on the date of grant.
On August 12, 2022, the Company granted to each non-employee director restricted stock units with a grant-date fair value of $50 per award (resulting in total aggregate grant-date fair value of $300), which will vest in five equal, annual installments beginning with the first anniversary of the grant date, subject to the director’s continued service through such date, provided that, if the director makes himself available and consents to be nominated by the Company for continued service as a director, but is not nominated for the Board of Directors for election by stockholders, other than for good reason, as determined by the Board of Directors in its discretion, then the restricted stock units shall vest in full as of the director’s last date of service as a director of the Company.
On July 1, 2022, the Company, at the direction of the Board of Directors, granted on a pro rata basis for 2022 compensation 18,715 and 11,062 restricted stock units to former directors Michael Dill and Inez Tenenbaum, respectively. These restricted stock units were fully vested and settled on the date of grant.
On June 30, 2022, the Company granted 3,200 restricted stock units to Joshua Horowitz for strategic advisory service compensation. These restricted stock units were fully vested and settled on the date of grant.
On June 30, 2022, the Company, at the direction of the Board of Directors, accelerated the vesting of former director Michael Dill’s unvested restricted stock units granted September 6, 2018, September 6, 2019, August 24, 2020, and July 30, 2021, and issued 34,264 shares of common stock to Mr. Dill.
On June 8, 2022, the Company, at the direction of the Board of Directors, granted 10,000 restricted stock units to John Suzuki for bonus compensation. These restricted stock units were fully vested and settled on the date of grant.
On May 31, 2022, the Company granted 3,200 restricted stock units to Joshua Horowitz for strategic advisory service compensation. These restricted stock units were fully vested and settled on the date of grant.
On April 30, 2022, the Company granted 3,200 restricted stock units to Joshua Horowitz for strategic advisory service compensation. These restricted stock units were fully vested and settled on the date of grant.
On March 31, 2022, the Company granted 16,000 restricted stock units to Joshua Horowitz for strategic advisory service compensation. These restricted stock units were fully vested and settled on the date of grant.
On December 17, 2021, upon the resignation of former director John Struble, the Company, at the direction of the Board of Directors, accelerated the vesting of Mr. Struble’s unvested restricted stock units granted September 6, 2018, September 6, 2019, August 24, 2020, and July 30, 2021, and issued 34,264 shares of common stock to Mr. Struble.
On August 24, 2021, the Company granted to each non-employee director restricted stock units with a grant-date fair value of $40 per award (resulting in total aggregate grant-date fair value of $240), which will vest in five equal, annual installments beginning with the first anniversary of the grant date, subject to the director’s continued service through such date, provided that, if the director makes himself available and consents to be nominated by the Company for continued service as a director, but is not nominated for the Board of Directors for election by stockholders, other than for good reason, as determined by the Board of Directors in its discretion, then the restricted stock units shall vest in full as of the director’s last date of service as a director of the Company.
On July 30, 2021, the Company granted to each non-employee director restricted stock units with a grant-date fair value of $50 per award (resulting in total aggregate grant-date fair value of $250), which will vest in five equal, annual installments beginning with the first anniversary of the grant date, subject to the director’s continued service through such date, provided that, if the director makes himself available and consents to be nominated by the Company for continued service as a director, but is not nominated for the Board of Directors for election by stockholders, other than for good reason, as determined by the Board of Directors in its discretion, then the restricted stock units shall vest in full as of the director’s last date of service as a director of the Company.
On March 4, 2021, upon the resignation of former director Lewis Johnson, the Company, at the direction of the Board of Directors, accelerated the vesting of Mr. Johnson’s unvested restricted stock units granted September 6, 2018, September 6, 2019, and August 24, 2021, and issued 24,505 shares of common stock to Mr. Johnson.
There were 205,644 and 137,055 restricted stock units outstanding as of September 30, 2022, and December 31, 2021, respectively.
The Company recorded non-cash restricted stock unit compensation expense of $126 and $367 for the three and nine months ended September 30, 2022, respectively, compared with $34 and $162, respectively for the same periods last year.
A summary of non-vested restricted stock under the Company’s non-employee director share-based incentive compensation plan is as follows:
| | Number of Shares | | | Weighted Average Price per Share | |
Unvested at January 1, 2022 | | | 137,055 | | | $ | 3.33 | |
Granted | | | 204,287 | | | $ | 2.39 | |
Vested and issued | | | (135,698 | ) | | $ | 2.96 | |
Cancelled/forfeited | | | - | | | | | |
Unvested at September 30, 2022 | | | 205,644 | | | $ | 2.64 | |
10. Commitments and Contingencies
Legal Matters
From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of its business. On a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated, it records a liability in its consolidated financial statements. These legal accruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, the Company does not accrue legal reserves, consistent with applicable accounting guidance. There were no pending material claims or legal matters as of September 30, 2022.
Covid 19 and Geopolitical Tension
In December 2019, a novel strain of the coronavirus (COVID-19) surfaced in Wuhan, China, which spread globally and was declared a pandemic by the World Health Organization in March 2020. From that time, additional variants have surfaced. The COVID-19 pandemic continues to evolve, impacting the global economy, causing market instability and uncertainty in the labor market. The full extent of the impact of the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be predicted at this time. We will continue to monitor the COVID-19 pandemic as well as resulting legislative and regulatory changes to manage our response and assess and mitigate potential adverse impacts to our business. Even as the COVID-19 pandemic subsides, we may continue to experience an adverse impact to our business as a result of its national and global economic impact, including any recession that may occur in the future.
Additionally, U.S. and global markets and supply chains are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine.
Purchase Commitments
As of September 30, 2022, the Company had purchase commitments for inventory totaling approximately $13,276.
Significant Customers
Sales to United States government agencies represented approximately $4,196 (35.2%) and $11,161 (36.4%) of the Company’s net total sales for the three and nine months ended September 30, 2022, respectively, compared with approximately $6,371 (50.5%) and $13,237 (39.4%), for the same periods last year. Accounts receivable from agencies of the United States government were $1,545 as of September 30, 2022, compared with approximately $5,197 at the same date last year.
11. Debt
BK Technologies, Inc. (“BK Inc.”), a wholly owned subsidiary of the Company, entered into a $5,000 Credit Agreement and a related Line of Credit Note (the “Note” and collectively with the Credit Agreement, the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMC”) on January 30, 2021. The Credit Agreement provides for a revolving line of credit of up to $5,000, with availability under the line of credit subject to a borrowing base calculated as a percentage of accounts receivable and inventory. Proceeds of borrowings under the Credit Agreement may be used for general corporate purposes. The line of credit is collateralized by a blanket lien on all personal property of BK Technologies, Inc., pursuant to the terms of the Continuing Security Agreement with JPMC. The Company and each subsidiary of BK Inc. are guarantors of BK Technologies, Inc.’s obligations under the Credit Agreement, in accordance with the terms of the Continuing Guaranty. On January 31, 2022, our revolving credit facility, which originated on January 30, 2020, was extended for one year, through January 31, 2023.
Borrowings under the Credit Agreement will bear interest at the secured overnight financing rate plus a margin of 2.0%. The line of credit, as modified, is to be repaid in monthly payments of interest only, payable in arrears, commencing on February 1, 2022, with all outstanding principal and interest to be payable in full at maturity (January 31, 2023). As of September 30, 2022, the interest rate was 4.879%.
The Credit Agreement contains certain customary restrictive covenants, including restrictions on liens, indebtedness, loans and guarantees, acquisitions and mergers, sales of assets, and stock repurchases by BK Technologies, Inc. The Credit Agreement contains one financial covenant requiring BK Technologies, Inc., to maintain a tangible net worth of at least $20,000 at any fiscal quarter end.
The Credit Agreement provides for customary events of default, including: (1) failure to pay principal, interest or fees under the Credit Agreement when due and payable; (2) failure to comply with other covenants and agreements contained in the Credit Agreement and the other documents executed in connection therewith; (3) the making of false or inaccurate representations and warranties; (4) defaults under other agreements with JPMC or under other debt or other obligations of BK Technologies, Inc.; (5) money judgments and material adverse changes; (6) a change in control or ceasing to operate business in the ordinary course; and (7) certain events of bankruptcy or insolvency. Upon the occurrence of an event of default, JPMC may declare the entire unpaid balance immediately due and payable and/or exercise any and all remedial and other rights under the Credit Agreement.
BK Technologies, Inc. was in compliance with all covenants under the Credit Agreement as of September 30, 2022, and the date of filing this report. As of September 30, 2022, the Company had an outstanding balance of $4,458, and a net balance availability of $542 under the Credit Agreement. As of the date of filing this report, the Company had an outstanding balance of $4,458, and a net balance availability of $542 under the Credit Agreement.
On April 6, 2021, BK Technologies, Inc., a wholly owned subsidiary of BK Technologies Corporation, and JPMC, as a lender, entered into a Master Loan Agreement in the amount of $743 to finance various items of manufacturing equipment. The loan is collateralized by the equipment purchased using the proceeds. The Master Loan Agreement is payable in 48 equal monthly principal and interest payments of approximately $16 beginning on May 8, 2021, matures on April 8, 2025, and bears a fixed interest rate of 3.0%.
On September 25, 2019, BK Technologies, Inc., a wholly owned subsidiary of the Company, and U.S. Bank Equipment Finance, a division of U.S. Bank National Association, as a lender, entered into a Master Loan Agreement in the amount of $425 to finance various items of manufacturing equipment. The loan is collateralized by the equipment purchased using the proceeds. The Master Loan Agreement is payable in 60 equal monthly principal and interest payments of approximately $8 beginning on October 25, 2019, matures on September 25, 2024, and bears a fixed interest rate of 5.11%.
The following table summarizes the notes payable principle repayments subsequent to September 30, 2022:
| | September 30, 2022 | |
Remaining three months of 2022 | | $ | 68 | |
2023 | | | 278 | |
2024 | | | 263 | |
2025 | | | 65 | |
Total payments | | $ | 674 | |
12. Leases
The Company accounts for its leasing arrangements in accordance with Topic 842, “Leases”. The Company leases manufacturing and office facilities and equipment under operating leases and determines if an arrangement is a lease at inception. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.
As most of its leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company has lease agreements with lease and non-lease components, which are accounted for separately.
The Company leases approximately 54,000 square feet (not in thousands) of industrial space in West Melbourne, Florida, under a non-cancellable operating lease. The lease has the expiration date of September 30, 2027. Annual rental, maintenance and tax expenses for the facility are approximately $491.
In February 2020, the Company entered into a lease for 6,857 square feet (not in thousands) of office space at Sawgrass Technology Park, 1619 NW 136th Avenue in Sunrise, Florida, for a period of 64 months commencing July 1, 2020. Annual rental, maintenance and tax expenses for the facility will be approximately $196 for the first year, increasing by approximately 3% for each subsequent 12-month period.
In March 2021, the Company executed an agreement for the termination of its lease for 8,100 square feet (not in thousands) of office space in Lawrence, Kansas, effective March 31, 2021 and recognized a “Lease Termination” expense of approximately $53. The original term of the lease was through December 31, 2021.
Lease costs consisted of the following:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, 2022 | | | September 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | |
Operating lease cost | | $ | 136 | | | $ | 136 | | | $ | 408 | | | $ | 438 | |
Short-term lease cost | | | — | | | | — | | | | — | | | | — | |
Variable lease cost | | | 33 | | | | 33 | | | | 99 | | | | 98 | |
Total lease cost | | $ | 169 | | | $ | 169 | | | $ | 507 | | | $ | 536 | |
Supplemental cash flow information related to leases was as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, 2022 | | | September 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | | |
Operating cash flows (fixed payments) | | $ | 147 | | | $ | 143 | | | $ | 435 | | | $ | 495 | |
Operating cash flows (liability reduction) | | $ | 114 | | | $ | 104 | | | $ | 331 | | | $ | 375 | |
| | | | | | | | | | | | | | | | |
ROU assets obtained in exchange for lease obligations: | | | | | | | | | | | | | | | | |
Operating leases | | $ | — | | | $ | — | | | $ | — | | | $ | 14 | |
Other information related to operating leases was as follows:
| | September 30, 2022 | |
Weighted average remaining lease term (in years) | | | 4.46 | |
Weighted average discount rate | | | 5.50 | % |
Maturity of lease liabilities as of September 30, 2022, were as follows:
| | September 30, 2022 | |
Remaining three months of 2022 | | $ | 148 | |
2023 | | | 595 | |
2024 | | | 608 | |
2025 | | | 618 | |
2026 | | | 479 | |
Thereafter | | | 242 | |
Total payments | | | 2,690 | |
Less: imputed interest | | | (305 | ) |
Total present value of lease liability | | $ | 2,385 | |
13. Subsequent events
On October 27, 2022, the Company entered into a Letter of Intent (the “LOI”) with Alterna Capital Solutions, LLC for a one-year Line of Credit with total maximum funding up to $15 million, with an interest rate of Prime plus 1.85% and other monthly administrative fees. The proposed line of credit would be an accounts receivable and inventory financing facility, with the borrowing base of up to 85% of eligible accounts receivable and up to 75% of net orderly liquidation value of inventory, not to exceed 100% of eligible accounts receivable. The Company plans to use the funds obtained from the Line of Credit to replace the existing JPMorgan Chase Bank Line of Credit agreement described in Footnote 11 of these condensed consolidated financial statements and for working capital for the business. The Company cannot guarantee that the transaction contemplated by the LOI will be consummated on the terms proposed in the LOI as described above, if at all.