See the Consolidated Financial Statements included in this report.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
1. Summary of Significant Accounting Policies
Description of Business
BK Technologies Corporation (collectively with its subsidiaries, the “Company”) is a holding company. The primary business of its wholly-owned operating subsidiary, BK Technologies, Inc., is the designing, manufacturing and marketing of wireless communications equipment primarily consisting of two-way land mobile radios and related products, which are sold in two primary markets: (1) the government and public safety market, and (2) the business and industrial market. The Company has only one reportable business segment.
On March 28, 2019, BK Technologies, Inc., the predecessor of BK Technologies Corporation, implemented a holding company reorganization, which resulted in BK Technologies Corporation becoming the direct parent company of, and the successor issuer to, BK Technologies, Inc. For the purpose of this report, references to the “Company” or its management or business at any period prior to the holding company reorganization (March 28, 2019) refer to those of BK Technologies, Inc. as the predecessor company and its subsidiaries and thereafter to those of BK Technologies Corporation and its subsidiaries, except as otherwise specified or to the extent the context otherwise indicates.
Principles of Consolidation
The accounts of the Company have been included in the accompanying 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.
Inventories
Inventories are stated at the lower of cost (determined by the average cost method) or net realizable value. Freight costs are classified as a component of cost of products in the accompanying consolidated statements of operations.
The allowance for slow-moving, excess, and obsolete inventory is used to state the Company’s inventories at the lower of cost or net realizable value. Because the amount of inventory that will actually be recouped through sales cannot be known with certainty at any particular time, the Company relies on past sales experience, future sales forecasts, and its strategic business plans. Generally, in analyzing inventory levels, inventory is classified as having been used or unused during the past year. The Company then establishes an allowance based upon several factors, including, but not limited to, business forecasts, inventory quantities and historic usage profile.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
1. Summary of Significant Accounting Policies (Continued)
Supplemental to the aforementioned analysis, specific inventory items are reviewed individually by management. Based on the review, considering business levels, future prospects, new products and technology changes, management, using its business judgment, may adjust the valuation of specific inventory items to reflect an accurate valuation estimate. Management also performs a determination of net realizable value for all finished goods with a selling price below cost. For all such items, the inventory is valued at not more than the selling price less cost, if any, to sell.
Property, Plant and Equipment
Property, plant and equipment is carried at cost less accumulated depreciation. Expenditures for maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the resulting gain or loss is reflected in operations for the period.
Depreciation and amortization are generally computed on the straight-line method using lives of 3 to 10 years for machinery and equipment and 5 to 8 years for leasehold improvements.
Impairment of Long-Lived Assets
Management regularly reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds their fair value, which considers the discounted future net cash flows. No long-lived assets were considered impaired at December 31, 2022 and 2021.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on specifically identified amounts that the Company believes to be uncollectible. The Company also records an additional allowance based on certain percentages of the Company’s aged receivables, which are determined based on historical experience and the Company’s assessment of the general financial conditions affecting the Company’s customer base. If the Company’s actual collections experience changes, revisions to the Company’s allowance may be required. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, management believes the allowance for doubtful accounts as of December 31, 2022 and 2021 is adequate.
Revenue Recognition
The Company recognizes revenues in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” and the additional related ASUs (“ASC 606”), which replaced previous revenue guidance and outlines a single set of comprehensive principles for recognizing revenue under accounting principles generally accepted in the United States of America (“GAAP”). These standards provide guidance on recognizing revenue, including a five-step method to determine when revenue recognition is appropriate:
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
1. Summary of Significant Accounting Policies (Continued)
Step 1: Identify the contract with the customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price;
Step 4: Allocate the transaction price to the performance obligations; and
Step 5: Recognize revenue as the Company satisfies a performance obligation.
ASC 606 provides that sales revenue is recognized when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company generally satisfies performance obligations upon shipment of the product or service to the customer. This is consistent with the time in which the customer obtains control of the product or service. For extended warranties, sales revenue associated with the warranty is deferred at the time of sale and later recognized on a straight-line basis over the extended warranty period. Some contracts include installation services, which are completed in a short period of time and the revenue is recognized when the installation is complete. Customary payment terms are granted to customers, based on credit evaluations. Currently, the Company does not have any contracts where revenue is recognized, but the customer payment is contingent on a future event.
The Company periodically reviews its revenue recognition procedures to assure that such procedures are in accordance with GAAP. Surcharges collected on certain sales to government customers and remitted to governmental agencies are not included in revenues or in costs and expenses.
Income Taxes
The Company accounts for income taxes using the asset and liability method specified by GAAP. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply in the period in which the deferred tax asset or liability is expected to be realized. The effect of changes in net deferred tax assets and liabilities is recognized on the Company’s consolidated balance sheets and consolidated statements of operations in the period in which the change is recognized. Valuation allowances are provided to the extent that impairment of tax assets is more likely than not. In determining whether a tax asset is realizable, the Company considers, among other things, estimates of future earnings based on information currently available, current and anticipated customers, contracts and new product introductions, as well as recent operating results and certain tax planning strategies. If the Company fails to achieve the future results anticipated in the calculation and valuation of net deferred tax assets, the Company may be required to increase the valuation allowance related to its deferred tax assets in the future.
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. At December 31, 2022 and 2021, accounts receivable from governmental customers were approximately $3,772 and $1,500, respectively. Generally, receivables are due within 30 days. Credit losses relating to customers have been consistently within management’s expectations.
The Company primarily maintains cash balances at one financial institution. Accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250. From time to time, the Company has had cash in financial institutions in excess of federally insured limits. As of December 31, 2022, the Company had cash and cash equivalents in excess of FDIC limits of $1,782.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
1. Summary of Significant Accounting Policies (Continued)
Manufacturing and Raw Materials
The Company relies upon a limited number of manufacturers to produce its products and on a limited number of component suppliers. Some of these manufacturers and suppliers are in other countries. Approximately 17.0% of the Company’s material, subassembly and product procurements in 2022 were sourced internationally, of which approximately 80.6% were sourced from five suppliers. For 2021, approximately 32.4% of the Company’s material, subassembly and product procurements were sourced internationally, of which approximately 31.0% were sourced from seven suppliers. Purchase orders denominated in U.S. dollars are placed with these suppliers from time to time and there are no guaranteed supply arrangements or commitments.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Significant estimates include accounts receivable allowances, inventory obsolescence allowance, warranty allowance, and income tax accruals. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, trade accounts receivable, investment, accounts payable, accrued expenses, notes payable, credit facilities and other liabilities. As of December 31, 2022 and 2021, the carrying amount of cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses, notes payable, credit facilities 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. (“FGF”) made via 1347 LP. The Company used observable market data assumptions (Level 1 inputs, as defined in accounting guidance) that it believed 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 does it exert significant influence over the 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 observable 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 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.
On November 22, 2022, the Company’s subsidiaries, BK Technologies, Inc. and RELM Communications, Inc. (the “Subsidiaries”), entered into an Invoice Purchase and Security Agreement (“IPSA”) with Alterna Capital Solutions, LLC (“Alterna”), for a one-year Line of Credit with total maximum funding up to $15 million. The Company used funds obtained from the Line of Credit to replace the existing JPMC Credit Agreement which was to expire on January 31, 2023 (see Note 5).
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 15). 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.
Advertising and Promotion Costs
The cost for advertising and promotion is expensed as incurred. Advertising and promotion expenses are classified as part of selling, general and administrative (“SG&A”) expenses in the accompanying consolidated statements of operations. For the years ended December 31, 2022 and 2021, such expenses totaled $145 and $243, respectively.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
1. Summary of Significant Accounting Policies (Continued)
Engineering, Research and Development Costs
Included in SG&A expenses for the years ended December 31, 2022 and 2021 are engineering, research and development costs of $9,604 and $8,203, respectively.
Share-Based Compensation
The Company accounts for share-based arrangements in accordance with FASB ASC Topic 718 Compensation - Stock Compensation, which requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which the employee is required to provide service in exchange for the award requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
1. Summary of Significant Accounting Policies (Continued)
Earnings (loss) per share amounts are computed and presented for all periods in accordance with GAAP.
Comprehensive Income (loss)
Comprehensive income (loss) was equal to net income (loss) for the years ended December 31, 2022 and 2021.
Product Warranty
The Company offers two-year standard warranties to its customers, depending on the specific product and terms of the customer purchase agreement. The Company’s typical warranties require it to repair and replace defective products during the warranty period at no cost to the customer. At the time the product revenue is recognized, the Company records a liability for estimated costs under its warranties. The costs are estimated based on historical experience. The Company periodically assesses the adequacy of its recorded liability for product warranties and adjusts the amount as necessary.
Recent Accounting Pronouncements
The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
Change in Accounting Principle
As disclosed in Note 2, 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.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
2. 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.
Inventories, which are presented net of allowance for slow-moving, excess and obsolete inventory, consisted of the following:
| | December 31, 2022 | | | December 31, 2021 | |
Finished goods | | $ | 2,965 | | | $ | 2,335 | |
Work in process | | | 7,313 | | | | 4,527 | |
Raw materials | | | 11,827 | | | | 10,116 | |
| | $ | 22,105 | | | $ | 16,978 | |
Changes in the allowance for slow-moving, excess, and obsolete inventory are as follows:
| | Years Ended December 31, | |
| | 2022 | | | 2021 | |
Balance, beginning of year | | $ | 1,288 | | | $ | 588 | |
Charged to cost of sales | | | 81 | | | | 700 | |
Disposal of inventory | | | (122 | ) | | | — | |
Balance, end of year | | $ | 1,247 | | | $ | 1,288 | |
During the year ended December 31, 2022, the Company recorded one-time, non-cash write-offs of new product development materials and inventory of $900 related to the BKR products, $646 was recorded in Selling, general and administrative expenses and $254 was recorded as cost of products. Direct write-off's were not significant during the year ended December 31, 2021.
3. Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts are composed of the following:
| | Years Ended December 31, | |
| | 2022 | | | 2021 | |
Balance, beginning of year | | $ | 50 | | | $ | 50 | |
Provision for doubtful accounts | | | 170 | | | | — | |
Uncollectible accounts written off | | | (170 | ) | | | — | |
Balance, end of year | | $ | 50 | | | $ | 50 | |
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
4. Property, Plant and Equipment, net
Property, plant and equipment, net include the following:
| | December 31, | |
| | 2022 | | | 2021 | |
Leasehold improvements | | $ | 614 | | | $ | 586 | |
Machinery and equipment | | | 15,721 | | | | 14,120 | |
Gross property, plant, and equipment | | | 16,335 | | | | 14,706 | |
Less accumulated depreciation and amortization | | | (11,451 | ) | | | (10,150 | ) |
Property, plant and equipment, net | | $ | 4,884 | | | $ | 4,556 | |
Depreciation and amortization expense relating to property, plant and equipment for the years ended December 31, 2022 and 2021 was approximately $1,423 and $1,394 respectively. During the year ended 31, 2022, the company removed from its records approximately $122 of fully depreciated machinery and equipment.
5. Debt
Credit Facilities
On November 22, 2022, the Company’s subsidiaries, BK Technologies, Inc. and RELM Communications, Inc. (the “Subsidiaries”), entered into an accounts receivable financing arrangement via an Invoice Purchase and Security Agreement (“IPSA”) with Alterna Capital Solutions, LLC (“Alterna”). On November 28, 2022, the Subsidiaries and Alterna entered into a rider on the IPSA, to modify the agreement to, among other things, provide a credit facility for up to 75% of net orderly liquidation value of inventory, not to exceed 100% of the eligible accounts receivable balance. The IPSA, which provides for a maximum capacity of up to $15 million, is scheduled to renew in November 2023, unless canceled by the mutual consent of the parties.
Under the arrangement, the Company may transfer eligible short-term trade receivables to the conduit, with full recourse, on a daily basis in exchange for cash. Generally, at the transfer date, the Company may receive cash equal to approximately 85% of the value of the transferred receivables. The Company accounts for the transfers of receivables as a secured borrowing due to the Company’s continuing involvement with the accounts receivable.
During 2022, the Company transferred receivables having an aggregate face value of $12.2 million to the conduit in exchange for proceeds of $10.4 million, of which $5.5 million was funded by re-invested collections. The Company also received cash proceeds of $0.8 million funding on net orderly liquidation value of inventory described above. There were no losses incurred on these transfers during the year ended December 31, 2022. The IPSA matures on November 22, 2023, and bears an interest rate of Prime plus 1.85%. The IPSA had an interest of 8.35% as of December 31, 2022. Interest and related servicing fees for the year ended December 31, 2022 were approximately $0.1 million.
At December 31, 2022, the outstanding borrowings under this credit facility approximated $5.9 million and the outstanding principal amount of receivables transferred under this facility amounted to $6.1 million.
On January 13, 2020, the Company’s subsidiary, BK Technologies, Inc., executed Credit Agreement (the “Original Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMC”) and a Line of Credit Note in favor of JPMC in an aggregate principal amount of up to $5,000,000 (the “Original Note”), each dated as of January 13, 2020. The Original Note had a maturity date of January 31, 2021. On January 26, 2021, BK Technologies, Inc. and JPMC entered into a Note Modification Agreement (the “Modification”), to modify the Original Note to, among other things, extend the maturity date of the Original Note to January 31, 2022. Then, on January 21, 2022, BK Technologies, Inc. and JPMC entered into a First Amendment to Credit Agreement (the “Amendment”) to, among other things, extend the maturity date to January 31, 2023. Also on January 31, 2022, BK Technologies, Inc. delivered to JPMC a related Line of Credit Note (the “Note” and collectively with the Original Credit Agreement, as modified by the Modification and the Amendment , the “Credit Agreement”), in replacement, renewal and extension of the Original Note, as previously modified, which had a maturity date of January 31, 2023. The outstanding balance for this credit facility of $4.5 million. was paid off in November 2022 with funds received from the IPSA funding.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
5. Debt (Continued)
Notes Payable
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 BK Technologies Corporation, 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 equipment. The loan is collateralized by the equipment purchased using the proceeds. The Master Loan Agreement is payable in 60 monthly principal and interest payments of approximately $8 beginning on October 25, 2019 and maturing on September 25, 2024, and bears a fixed interest rate of 5.11%.
The following table summarizes the notes payable principal repayments subsequent to December 31, 2022:
| | December 31, 2022 | |
2023 | | $ | 277 | |
2024 | | | 263 | |
2025 | | | 66 | |
Total payments | | $ | 606 | |
6. Investments
Through September 14, 2022, 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 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.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
6. Investments (Continued)
On September 14, 2022, FG contributed all of the shares of FGF held by 1347 LP to FG Financial Holdings, LLC (“FG Holdings”), with an approximate value of $945, based on the FGF stock's published price of $1.98, in exchange for Series B Common Interests of FG Holdings, with an equivalent value. The Company recognized a loss of $850 in September 2022 as a result.
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 owns 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 investments.
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 December 31, 2022, FG Holdings ownes shares of FGF’s common stock and preferred stock. 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 FG Group Holdings, Inc., a Series B member in FG Holdings. Mr. Cerminara also serves as Chairman of the Board of Directors of FGF.
During the years ended December 31, 2022 and 2021, the Company recognized a loss of approximately $313 and $219, respectively, due to changes in the unrealized loss on investments.
7. Leases
The Company accounts for its leasing arrangements in accordance with FASB 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 June 30, 2027. Rental, maintenance and tax expenses for this facility were approximately $688 and $556 in 2022 and 2021, respectively.
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 were approximately $203 and $208 in 2022 and 2021, respectively.
7. Leases (Continued)
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 termination lease expense of approximately $53. The original term of the lease was through December 31, 2021.
Lease costs consist of the following:
| | December 31, | |
| | 2022 | | | 2021 | |
Operating lease cost | | $ | 544 | | | $ | 573 | |
Variable lease cost | | | 132 | | | | 131 | |
Total lease cost | | $ | 676 | | | $ | 704 | |
Supplemental cash flow information related to leases was as follows:
| | December 31, | |
| | 2022 | | | 2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows (fixed payments) | | $ | 583 | | | $ | 639 | |
Operating cash flows (liability reduction) | | | 447 | | | | 481 | |
| | | | | | | | |
ROU assets obtained in exchange for lease obligations: | | | | | | | | |
Operating leases | | | — | | | | 14 | |
Other information related to operating leases was as follows:
| | December 31, 2022 | |
Weighted average remaining lease term (in years) | | | 4.22 | |
Weighted average discount rate | | | 5.50 | % |
Maturity of lease liabilities as of December 31, 2022 were as follows:
| | Year ending December 31, | |
2023 | | $ | 595 | |
2024 | | | 608 | |
2025 | | | 618 | |
2026 | | | 479 | |
2027 | | | 243 | |
Thereafter | | | — | |
Total payments | | | 2,543 | |
Less: imputed interest | | | (273 | ) |
Total liability | | $ | 2,270 | |
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
8. Income Taxes
The income tax expense (benefit) is summarized as follows:
| | Years Ended December 31, | |
| | 2022 | | | 2021 | |
Current: | | | | | | |
Federal | | $ | 0 | | | $ | 0 | |
State | | | 0 | | | | 3 | |
| | | 0 | | | | 3 | |
Deferred: | | | | | | | | |
Federal | | | 0 | | | | 184 | |
State | | | 0 | | | | 0 | |
| | | 0 | | | | 184 | |
| | $ | 0 | | | $ | 187 | |
A reconciliation of the statutory U.S. income tax rate to the effective income tax rate follows:
| | Years Ended December 31, | |
| | 2022 | | | 2021 | |
| | | | | | |
Statutory U.S. income tax rate | | | (21.00 | )% | | | (21.00 | )% |
State taxes, net of federal benefit | | | 0.00 | % | | | (.16 | )% |
Permanent differences | | | .12 | % | | | (1.31 | )% |
Change in valuation allowance | | | 23.60 | % | | | (26.32 | )% |
Change in tax credits and state NOLs | | | (3.38 | )% | | | 16.72 | % |
Impact from accounting method change and expired options | | | 0.66 | % | | | 19.72 | % |
Effective income tax rate | | | 0.00 | % | | | (12.35 | )% |
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
8. Income Taxes (Continued)
The components of the deferred income tax assets (liabilities) are as follows:
| | Years Ended December 31, | |
| | 2022 | | | 2021 | |
Deferred tax assets: | | | | | | |
Operating loss carryforwards | | $ | 2,989 | | | $ | 984 | |
R&D Tax Credit | | | 2,625 | | | | 2,233 | |
Section 263A costs | | | 50 | | | | 38 | |
Amortization | | | 15 | | | | 18 | |
Net ROU asset and lease liability | | | 63 | | | | | |
Unrealized loss | | | 508 | | | | 442 | |
| | | | | | | | |
Asset reserves: | | | | | | | | |
Bad debts | | | 11 | | | | 11 | |
Inventory allowance | | | 280 | | | | 292 | |
| | | | | | | | |
Accrued expenses: | | | | | | | | |
Non-qualified stock options | | | 159 | | | | 127 | |
Compensation | | | 86 | | | | 116 | |
Warranty | | | 1,174 | | | | 971 | |
Deferred tax assets | | | 7,960 | | | | 5,235 | |
| | | | | | | | |
Less valuation allowance | | | (3,356 | ) | | | (610 | ) |
Total deferred tax assets | | | 4,604 | | | | 4,625 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Depreciation | | | (488 | ) | | | (509 | ) |
Total deferred tax liabilities | | | (488 | ) | | | (509 | ) |
| | | | | | | | |
Net deferred tax assets (before unrealized gain) | | | 4,116 | | | | 4,116 | |
| | | | | | | | |
Deferred tax liability: unrealized gain | | | — | | | | — | |
Net deferred tax assets | | $ | 4,116 | | | $ | 4,116 | |
As of December 31, 2022, the Company had a net deferred tax asset of approximately $4,604 (net of valuation allowance) offset by deferred tax liabilities of $488 derived from accelerated tax depreciation. This asset is primarily composed of net operating loss carryforwards (“NOLs”), research and development tax credits, and deferred revenue, net of a valuation allowance of approximately $3,356. The NOLs total approximately $13,088 for federal and $8,604 for state purposes, with expirations starting in 2022 for state purposes. State NOLs of $1,870 expired in 2022.
During 2021, the Company generated $126 of federal NOLs and during 2022, the Company generated $9,261 in additional federal NOLs. The deferred tax asset amounts are based upon management’s conclusions regarding, among other considerations, the Company’s current and anticipated customer base, contracts, and product introductions, certain tax planning strategies, and management’s estimates of future earnings based on information currently available, as well as recent operating results during 2022, 2021, and 2020. GAAP requires that all positive and negative evidence be analyzed to determine if, based on the weight of available evidence, the Company is more likely than not to realize the benefit of the deferred tax asset.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
8. Income Taxes (Continued)
Management’s analysis of all available evidence, both positive and negative, provides support that the Company does not have the ability to generate sufficient taxable income in the necessary period to utilize the entire benefit for the deferred tax asset. Accordingly, as of December 31, 2022, a valuation allowance has been established totaling approximately $3,356.
Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s net deferred tax asset may be necessary. If future losses are incurred, it may be necessary to record an additional valuation allowance related to the Company’s net deferred tax asset recorded as of December 31, 2022. It cannot presently be estimated what, if any, changes to the valuation of the Company’s deferred tax asset may be deemed appropriate in the future. The 2022 federal and state NOLs and tax credit carryforwards could be subject to limitation if, within any three-year period prior to the expiration of the applicable carryforward period, there is a greater than 50% change in ownership of the Company by any stockholder with 5% or greater ownership.
The Company performed a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by GAAP. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, on January 1, 2023, the Company is not aware of any uncertain tax positions that would require additional liabilities or which such classification would be required. The amount of unrecognized tax positions did not change as of December 31, 2022, and the Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.
Penalties and tax-related interest expense, of which there were no material amounts for the years ended December 31, 2022 and 2021, are reported as a component of income tax expense (benefit).
The Company files federal income tax returns, as well as multiple state and local jurisdiction tax returns. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution on any particular uncertain tax position, the Company believes that its allowances for income taxes reflect the most probable outcome. The Company adjusts these allowances, as well as the related interest, in light of changing facts and circumstances. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. The calendar years 2019, 2020, and 2021 are still open to IRS examination under the statute of limitations. The last IRS examination on the Company’s 2007 calendar year was closed with no change.
9. Income (Loss) Per Share
The following table sets forth the computation of basic and diluted loss per share: | | Years Ended December 31, | |
| | 2022 | | | 2021 | |
Numerator: | | | | | | |
Net (loss) from continuing operations numerator for basic and diluted earnings per share | | $ | (11,633 | ) | | $ | (1,701 | ) |
Denominator: | | | | | | | | |
Denominator for basic (loss) per share weighted average shares | | | 16,910,914 | | | | 14,941,028 | |
Effect of dilutive securities: | | | — | | | | — | |
Denominator for diluted (loss) per share weighted average shares | | | 16,910,914 | | | | 14,941,028 | |
Basic (loss) income per share | | $ | (0.69 | ) | | $ | (0.11 | ) |
Diluted (loss) per share | | $ | (0.69 | ) | | $ | (0.11 | ) |
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
9. Income (Loss) Per Share (Continued)
Approximately 1,001,500 stock options and 205,644 restricted stock units for the year ended December 31, 2022 and 676,500 stock options and 137,055 restricted stock units for the year ended December 31, 2021, were excluded from the calculation because they were anti-dilutive.
10. Share-Based Employee Compensation
The Company has an employee and non-employee director incentive compensation equity plan. Related to these programs, the Company recorded $271 and $253 of share-based employee compensation expense during the years ended December 31, 2022 and 2021, respectively, which is included as a component of cost of products and SG&A expenses in the accompanying consolidated statements of operations. No amount of share-based employee compensation expense was capitalized as part of capital expenditures or inventory for the years presented.
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 129,310 units granted with the 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.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
10. Share-Based Employee Compensation (Continued)
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, 2020, and issued 24,505 shares of common stock to Mr. Johnson.
There were 205,644 and 137,055 restricted stock units outstanding as of December 31, 2022, and December 31, 2021, respectively.
The Company recorded non-cash restricted stock unit compensation expense of $404 and $306 for the years ended December 31, 2022 and 2021.
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 December 31, 2022 | | | 205,644 | | | $ | 2.64 | |
The Company uses the Black-Scholes-Merton option valuation model to calculate the fair value of a stock option grant. The share-based employee compensation expense recorded in the years ended December 31, 2022 and 2021 was calculated using the assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company’s common stock over the period of time, commensurate with the expected life of the stock options. The dividend yield assumption is based on the Company’s expectations of dividend payouts at the grant date. In 2022, the Company paid dividends on January 10, for a dividend declared in 2021, May 16, August 8 and November 8. The Company has estimated its future stock option exercises. The expected term of option grants is based upon the observed and expected time to the date of post vesting exercises and forfeitures of options by the Company’s employees. The risk-free interest rate is derived from the average U.S. Treasury rate for the period, which approximates the rate at the time of the stock option grant.
| | FY 2022 | | | FY 2021 | |
Expected Volatility | | | 55.3 | % | | | 52.3 | % |
Expected Dividends | | | 5.0 | % | | | 3.0 | % |
Expected Term (in years) | | | 6.5 | | | | 6.5 | |
Risk-Free Rate | | | 2.38 | % | | | 0.80 | % |
Estimated Forfeitures | | | 0.0 | % | | | 0.0 | % |
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
10. Share-Based Employee Compensation (Continued)
A summary of stock option activity under the Company’s equity compensation plans as of December 31, 2022, and changes during the year ended December 31, 2022, are 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 ($) | |
| | | | | | | | | |
As of January 1, 2022 | | | | | | | |
Outstanding | | | 676,500 | | | | 3.68 | | | | 7.33 | | | | 1.41 | | | | 4,500 | |
Vested | | | 361,600 | | | | 3.80 | | | | 6.66 | | | | 1.44 | | | | 4,500 | |
Nonvested | | | 314,900 | | | | 3.53 | | | | 8.10 | | | | 1.39 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Period activity | | | | | | | | | | | | | | | | | | | | |
Issued | | | 430,000 | | | | 2.41 | | | | — | | | | 0.80 | | | | — | |
Exercised | | | — | | | | — | | | | — | | | | — | | | | — | |
Forfeited | | | 100,000 | | | | 3.98 | | | | — | | | | 1.65 | | | | — | |
Expired | | | 5,000 | | | | 4.95 | | | | — | | | | 1.05 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
As of December 31, 2022 | | | | | | | | | | | | | | | | | | | | |
Outstanding | | | 1,001,500 | | | | 3.10 | | | | 7.87 | | | | 1.13 | | | | 460,925 | |
Vested | | | 434,233 | | | | 3.57 | | | | 6.73 | | | | 1.31 | | | | 101,090 | |
Nonvested | | | 567,267 | | | | 2.74 | | | | 8.74 | | | | 0.99 | | | | 359,835 | |
Outstanding: | | | | | | | | | | | | | |
Range of Exercise Prices ($) Per Share | | | Stock Options Outstanding | | | Wgt. Avg. Exercise Price ($) Per Share | | | Wgt. Avg. Remaining Contractual Life (Years) | |
| | | | | | | | | | | |
| 2.23 | | | | 3.83 | | | | 832,500 | | | | 2.80 | | | | 8.44 | |
| 4.07 | | | | 5.10 | | | | 169,000 | | | | 4.54 | | | | 5.06 | |
| | | | | | | | | 1,001,500 | | | | 3.10 | | | | 7.87 | |
| | | | | | | | | | | | | | | | | | |
Exercisable: | | | | | | | | | | | | | | | | | |
Range of Exercise Prices ($) Per Share | | | Stock Options Exercisable | | | | Wgt. Avg. Exercise Price ($) Per Share | | | | | |
| | | | | | | | | | | | | | | | | | |
| 2.23 | | | | 3.83 | | | | 290,833 | | | | 3.05 | | | | | |
| 4.07 | | | | 5.10 | | | | 143,400 | | | | 4.62 | | | | | |
| | | | | | | | | 424,233 | | | | 3.57 | | | | | |
The weighted-average grant-date fair value per option granted during the years ended December 31, 2022 and 2021 was $1.13 and $1.16, respectively. There were no stock options exercised during the years ended December 31, 2022 and 2021.
In connection with the restricted stock units granted to non-employee directors, the Company accrues compensation expense based on the estimated number of shares expected to be issued, utilizing the most current information available to the Company at the date of the consolidated financial statements. The Company estimates the fair value of the restricted stock unit awards based upon the market price of the underlying common stock on the date of grant. As of December 31, 2022 and 2021, there was approximately $1,058 and $802, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements, including stock options and restricted stock units. This compensation cost is expected to be recognized approximately over four years.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
11. Significant Customers
Sales to the U.S. Government represented approximately 38% and 36% of the Company’s total sales for the years ended December 31, 2022 and 2021, respectively. These sales were primarily to the various government agencies, including those within the United States Department of Defense, the United States Forest Service, the United States Department of Interior, and the United States Department of Homeland Security.
12. Retirement Plan
The Company sponsors a participant contributory retirement 401(k) plan, which is available to all employees. The Company’s contribution to the plan is either a percentage of the participant’s contribution (50% of the participant’s contribution up to a maximum of 6%) or a discretionary amount. For the years ended December 31, 2022 and 2021, total contributions made by the Company were $196 and $160, respectively.
13. Commitments and Contingencies
Royalty Commitment
In 2002, the Company entered into a technology license related to its development of digital products. Under this agreement, the Company is obligated to pay a royalty for each product sold that utilizes the technology covered by this agreement. The Company paid $120 and $114 for the years ended December 31, 2022 and 2021, respectively. The agreement has an indefinite term, and can be terminated by either party under certain conditions.
Purchase Commitments
The Company has purchase commitments for inventory totaling $12,814 as of December 31, 2022.
Self-Insured Health Benefits
The Company maintains a self-insured health benefit plan for its employees. This plan is administered by a third party. As of December 31, 2022, the plan had a stop-loss provision insuring losses beyond $90 per employee per year and an aggregate stop-loss of $1,180. As of December 31, 2022 and 2021, the Company recorded an accrual for estimated claims in the amount of approximately $240 and $97, respectively, in accrued other expenses and other current liabilities on the Company’s consolidated balance sheets.This amount represents the Company’s estimate of incurred but not reported claims as of December 31, 2022 and 2021.
Liability for Product Warranties
Changes in the Company’s liability for its standard two-year product warranties during the years ended December 31, 2022 and 2021 are as follows:
| | Balance at Beginning of Year | | | Warranties Issued | | | Warranties Settled | | | Balance at End of Year | |
2022 | | $ | 533 | | | $ | 558 | | | $ | (500 | ) | | $ | 591 | |
2021 | | $ | 791 | | | $ | 169 | | | $ | (427 | ) | | $ | 533 | |
Legal Proceedings
From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of its business.
There were no pending material claims or legal matters as of December 31, 2022.
BK TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31, 2022 AND 2021
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and percentages)
13. Commitments and Contingencies (Continued)
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 military conflict between Russia and Ukraine.
14. Capital Program
On December 17, 2021 a share repurchase program was authorized under which the Company may repurchase up to an aggregate of $5 million of its common shares. Share repurchases under this program were authorized to begin immediately. The program does not have an expiration date. Any repurchases would be funded using cash on hand and cash from operations. The actual timing, manner and number of shares repurchased under the program will be determined by management and the Board of Directors at their discretion, and will depend on several factors, including the market price of the Company’s common shares, general market and economic conditions, alternative investment opportunities, and other business considerations in accordance with applicable securities laws and exchange rules. The authorization of the share repurchase program does not require the Company to acquire any particular number of shares and repurchases may be suspended or terminated at any time at the Company’s discretion. As of December 31, 2022, the Company has completed no share repurchases under this program.
Pursuant to the capital return program, during 2021, the Company’s Board of Directors declared quarterly dividends on the Company’s common stock of $0.02 per share on March 16, July 8, September 23, and $0.03 per share on December 17. The dividends were payable to stockholders of record as of April 12 2021, July 26, 2021, October 7, 2021and January 10, 2022, respectively. These dividends were paid on April 26, 2021, August 9, 2021, October 18, 2021, and January 24, 2022.
Pursuant to the capital return program, during 2022, the Company’s Board of Directors declared quarterly dividends on the Company’s common stock of $0.03 per share on April 7, June 30, and September 29. The dividends were payable to stockholders of record as of May 2, 2022, July 25, 2022, and October 25, 2022, respectively. These dividends were paid on May 16, 2022, August 8, 2022 and November 8, 2022.
15. Subsequent events
On January 31, 2023 the Company entered into a sales agreement (the “Sales Agreement”) with ThinkEquity LLC (“ThinkEquity” or the “Sales Agent”), relating to the sale of shares of our common stock, $0.60 par value per share. In accordance with the terms of the Sales Agreement, we may offer and sell up to 4,225,352 shares of our common stock from time to time up to an aggregate offering price of $15,000,000 through or to the Sales Agent, acting as sales agent or principal. The Company intends to use the net proceeds from the offering primarily for general corporate purposes, which may include working capital, capital expenditures, operational purposes, strategic investments and potential acquisitions in complementary businesses.