BK Technologies Corp - FORM 10-Q

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EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF THE SARBANES-OXLY ACT OF 2002 - BK Technologies Corp	relm_ex311.htm
EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - BK Technologies Corp	relm_ex322.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - BK Technologies Corp	relm_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF THE SARBANES-OXLY ACT OF 2002 - BK Technologies Corp	relm_ex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number 001-32644

RELM WIRELESS CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	59-3486297
State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization	Identification No.)

7100 Technology Drive

West Melbourne, Florida 32904

(Address of principal executive offices and Zip Code)

Registrant’s telephone number, including area code: (321) 984-1414

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☑
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

There were 13,754,749 shares of common stock, $0.60 par value, of the registrant outstanding at October 31, 2016.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

RELM WIRELESS CORPORATION

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	September 30,	December 31,
	2016	2015
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$8,621	$4,669
Trade accounts receivable, net	6,237	4,122
Inventories, net	13,284	16,282
Prepaid expenses and other current assets	1,821	3,081
Total current assets	29,963	28,154
Property, plant and equipment, net	2,629	1,840
Available-for-sale securities	6,472	3,402
Deferred tax assets, net	3,564	5,461
Capitalized software, net	211	370
Other assets	229	222
Total assets	$43,068	$39,449


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable	$2,811	$2,285
Accrued compensation and related taxes	1,939	1,136
Accrued warranty expense	586	538
Customer deposits	2	—
Accrued other expenses and other current liabilities	201	168
Deferred revenue	144	136
Total current liabilities	5,683	4,263

Deferred revenue	394	366
Total liabilities	6,077	4,629
Commitments and contingencies
Stockholders' equity:
Preferred stock; $1.00 par value; 1,000,000 authorized shares; none issued or outstanding	—	—
Common stock; $.60 par value; 20,000,000 authorized shares;13,754,749 and 13,730,562 issued and outstanding shares at September 30, 2016 and December 31, 2015, respectively	8,253	8,238
Additional paid-in capital	25,376	24,926
Retained earnings	1,384	1,259
Accumulated other comprehensive income	2,061	397
Treasury stock, at cost	(83)	—
Total stockholders' equity	36,991	34,820
Total liabilities and stockholders' equity	$43,068	$39,449

See notes to condensed consolidated financial statements.

RELM WIRELESS CORPORATION

Condensed Consolidated Statements of Income

(In thousands, except share and per share data) (Unaudited)

	Three Months Ended		Nine Months Ended
	September 30,2016	September 30,2015	September 30,2016	September 30,2015

Sales, net	$14,730	$7,606	$43,463	$22,773
Expenses
Cost of products	10,099	4,120	29,412	13,217
Selling, general and administrative	3,549	3,186	10,110	8,407
Total expenses	13,648	7,306	39,522	21,624

Operating income	1,082	300	3,941	1,149

Other income (expense):
Interest income	2	1	4	1
Other income (expense)	-	(4)	7	37
Total other income (expense)	2	(3)	11	38

Income before income taxes	1,084	297	3,952	1,187

Income tax expense	(365)	(85)	(1,355)	(358)
Net income	$719	$212	$2,597	$829

Net earnings per share-basic:	$0.05	$0.02	$0.19	$0.06
Net earnings per share-diluted:	$0.05	$0.02	$0.19	$0.06
Weighted average shares outstanding-basic	13,741,170	13,718,396	13,735,361	13,699,355
Weighted average shares outstanding-diluted	13,836,303	13,794,276	13,825,255	13,857,746

See notes to condensed consolidated financial statements.

RELM WIRELESS CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

	Three Months Ended		Nine Months Ended
	September 30,2016	September 30,2015	September 30,2016	September 30,2015

Net Income	$719	$212	$2,597	$829
Unrealized gain on available-
for-sale securities, net of tax	891	700	1,664	700
Total comprehensive income	$1,610	$912	$4,261	$1,529

See notes to condensed consolidated financial statements.

RELM WIRELESS CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

	Nine Months Ended
	September 30,2016	September 30,2015

Operating activities
Net income	$2,597	$829
Adjustments to reconcile net income to net cash provided by operating activities:
Inventories reserve	99	(30)
Deferred tax expense	972	354
Depreciation and amortization	718	697
Share-based compensation expense	42	33
Realized tax benefit from stock option exercise	393	-
Changes in operating assets and liabilities:
Accounts receivable	(2,115)	(950)
Inventories	2,899	(1,692)
Prepaid expenses and other current assets	1,260	(648)
Other assets	(7)	22
Accounts payable	526	1,199
Accrued compensation and related taxes	803	135
Accrued warranty expense	48	133
Customer deposits	2	-
Accrued other expenses and other current liabilities	33	(26)
Deferred revenue	36	-
Net cash provided by operating activities	8,306	56

Investing activities
Purchases of property, plant and equipment	(1,348)	(878)
Investment in securities	(481)	(2,761)
Net cash used in investing activities	(1,829)	(3,639)

Financing activities
Cash dividends paid	(2,472)	-
Repurchase of common stock	(83)	-
Proceeds from issuance of common stock	30	76
Cash (used in) provided by financing activities	(2,525)	76

Net change in cash and cash equivalents	3,952	(3,507)
Cash and cash equivalents, beginning of period	4,669	11,363
Cash and cash equivalents, end of period	$8,621	$7,856

Supplemental disclosure
Cash paid for interest	$-	$-
Income tax paid	$3	$25
Non-cash financing activity
Cashless exercise of stock options and related conversion of net shares to stockholders’ equity	$4	$15

See notes to condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements

Unaudited

(in Thousands, Except Share and Per Share Data and Percentages)

Condensed Consolidated Financial Statements

Basis of Presentation

The condensed consolidated balance sheets as of September 30, 2016, the condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2016 and 2015 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 have been prepared by RELM Wireless Corporation (the “Company”), and are unaudited. In the opinion of management, all adjustments, which include normal recurring adjustments, necessary for a fair presentation have been made. The condensed consolidated balance sheet at December 31, 2015 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 have been condensed or omitted. It is suggested that these condensed consolidated financial statements 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, 2015, as filed with the Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the operating results for a full year.

Fair Value

The Company’s financial instruments consist of cash and cash equivalents, trade accounts receivable, available-for-sale securities, accounts payable, accrued expenses and other liabilities. As of September 30, 2016 and December 31, 2015, the carrying amount of cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses and other liabilities approximated their respective fair value due to the short-term nature and maturity of these instruments.

The Company uses observable market data or assumptions (Level 1 inputs as defined in accounting guidance) that it believes market participants would use in pricing the available-for-sale securities. There were no sales of available-for-sale securities, nor gains or losses reclassified out of accumulated other comprehensive income as a result of an other-than-temporary impairment of the available-for-sale securities. There were no transfers of available-for-sale securities between Level 1 and Level 2 during the nine months ended September 30, 2016.

Available-For-Sale Securities

Investments reported on the September 30, 2016 balance sheet consist of marketable equity securities of a publicly held company. As of September 30, 2016 and December 31, 2015, the investment cost was $3,242 and $2,761, respectively. Management intends to hold such securities for a sufficient period in which to realize a reasonable return, which periods may range between one to several years, although there is no assurance that positive returns will be realized or that such securities will not be liquidated in a shorter-than-expected time frame to accommodate future liquidity requirements. Accordingly, investments were classified as non-current and available-for-sale. Investments are marked to market at each measurement date, with unrealized gains or losses presented as adjustments to accumulated other comprehensive income or loss.

Other Comprehensive Income

Other comprehensive income consists of net income and unrealized gain on available-for-sale securities, net of taxes.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 on revenue recognition, which provides for a single, principles-based model for revenue recognition and replaces the existing revenue recognition guidance. In August 2015, the FASB issued ASU 2015-14, which delays the effective date of ASU 2014-09 by one year. The guidance is effective for annual and interim periods beginning on or after December 15, 2017, and will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. It permits the use of either a retrospective or cumulative effect transition method and early adoption is not permitted. The Company is evaluating this standard and expects to have its analysis completed by mid-2017; however, preliminarily the Company does not expect that this new guidance will have a material effect on its consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” to simplify the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first out or the retail inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016 with early adoption permitted. The Company does not anticipate that the adoption of this new guidance will have a material impact on its consolidated financial statements and related disclosures.

In November 2015, the FASB released ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which will require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This is part of the FASB’s Simplification Initiative. For public business entities, the amendments in this update are effective for financial statements issued for annual periods after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company early adopted this standard as of December 31, 2015.

In January 2016, the FASB issued ASU 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company has not yet determined the potential effects of the adoption of ASU 2016-01 on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases," which amends leasing guidance by requiring companies to recognize a right-of-use asset and a lease liability for all operating and capital (finance) leases with lease terms of greater than twelve months. The lease liability will be equal to the present value of lease payments. The lease asset will be based on the lease liability, subject to adjustment, such as for initial direct costs. For income statement purposes, leases will continue to be classified as operating or capital (finance), with lease expense in both cases calculated substantially the same as under the prior leasing guidance. The updated guidance is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. The Company has not yet determined the potential effects of the adoption of ASU 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The guidance will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company has evaluated the impact of the future adoption of this standard and the Company does not expect the adoption to have a material effect on its consolidated financial statements.

Significant Events and Transactions

In September 2015, the Company received awards under the U.S. Department of Homeland Security (“DHS“) Tactical Communications Contract totaling approximately $26.2 million for portable radios, repeaters, accessories and service. The awards were for a base term of one-year that commenced on September 28, 2015 with four one-year options. The first option year was partially exercised immediately, and the remainder of the first option year was exercised in June 2016. Approximately $15.5 million, or almost 60% of the total amount, was specified in delivery orders. Shipments under the delivery orders totaled approximately $4.6 million and $14.0 million for the three and nine months ended September 30, 2016. The contract term has been extended for one additional year to September 27, 2017, but the exercise, if any, of the remaining option years, is not specified or guaranteed.

In February 2016, the Company received an additional order from the TSA totaling $4.2 million for accessories. Shipments for this order totaled approximately $1.0 million and $4.2 million for the three and nine months ended September 30, 2016. This order was fulfilled as of September 30, 2016.

In May 2016, the Company announced and began implementing a capital return program that included a stock repurchase program and a quarterly dividend. Under the program, the Company’s Board of Directors approved the repurchase of up to 500,000 shares of the Company's common stock, from time to time, pursuant to a stock repurchase plan in conformity with the provisions of Rule 10b5-1 and Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The repurchase program has no termination date. Please refer to Part II, Item 2 of this report for additional details. Pursuant to the program, the Company’s Board of Directors approved two quarterly dividends of $0.09 per share of the Company's common stock, one of which was paid on June 17, 2016 to shareholders of record as of June 1, 2016, and the other of which was paid on September 16, 2016 to shareholders of record as of September 1, 2016.

Allowance for Doubtful Accounts

The allowance for doubtful accounts on trade receivables was approximately $49 on gross trade receivables of $6,286 and $4,171 at September 30, 2016 and December 31, 2015, 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.

Inventories, net

The components of inventory, net of allowances for slow-moving, excess or obsolete inventory, consist of the following:

	September 30, 2016	December 31, 2015
Finished goods	$3,164	$4,029
Work in process	6,193	8,497
Raw materials	3,927	3,756
	$13,284	$16,282

Allowances for slow-moving, excess, or obsolete inventory are used to state the Company’s inventories at the lower of cost or market. The allowances were approximately $1,526 at September 30, 2016, compared with approximately $1,685 at December 31, 2015.

Income Taxes

Income tax expense totaling approximately $365 and $1,355 has been recorded for the three and nine months ended September 30, 2016, respectively, compared with $85 and $358, respectively, for the same period last year.

As of September 30, 2016 and December 31, 2015, the Company’s net deferred tax assets totaled approximately $3,564 and $5,461, respectively, and are primarily composed of net operating loss carryforwards (“NOLs”), and research and development costs and tax credits partially offset by deferred tax liabilities of $1,168 and $671, respectively, primarily derived from depreciation and the unrealized gain on available-for-sale securities. As of September 30, 2016, these NOLs total approximately $816 for federal and $11,575 for state purposes, with expirations starting in 2018 through 2030.

In order to fully utilize the net deferred tax assets, the Company will need to generate sufficient taxable income in future years to utilize its NOLs prior to their expiration. The Company analyzed all positive and negative evidence to determine if, based on the weight of available evidence, the Company 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, current and anticipated customers, contracts and product introductions, as well as historical operating results and certain tax planning strategies.

The Company has evaluated the available evidence and the likelihood of realizing the benefit of its net deferred tax assets. Based on its evaluation, the Company has concluded that based on the weight of available evidence, it is more likely than not that the Company will realize the full benefit of its net deferred tax assets recorded at September 30, 2016. 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, 2016.

Capitalized Software

The Company accounts for the costs of software within its products whereby certain software costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. The Company determines technological feasibility to be established upon the internal release of a detailed program design. Upon the general release of the product to customers, development costs for that product are amortized over periods not exceeding five years, based on current and future revenue of the product. For the three and nine months ended September 30, 2016, the Company did not capitalize any software costs. For the three and nine months ended September 30, 2016, the Company’s amortization cost was approximately $53 and $159, respectively, compared with $103 and $308, respectively, for the same periods last year. Net capitalized software costs totaled $211 and $370 as of September 30, 2016 and December 31, 2015, respectively.

Investment in Securities

As of September 30, 2016, the Company, through its wholly owned subsidiary, had purchased approximately 1.8 million shares of Iteris (NASDAQ: ITI), which represented approximately 5.5% of Iteris’s outstanding shares. At September 30, 2016, the corresponding unrealized gain of approximately $1,664, net of tax of $923, is included in accumulated other comprehensive income as a separate component of stockholders’ equity. There was no impact to the Company’s statement of income.

On July 29, 2016, the Company, one of the Company’s significant stockholders, and certain of their affiliates entered into an agreement with Iteris. Pursuant to the agreement, a Director of the Company, who is an executive, co-founder and partner of the significant stockholder that is party to the agreement, was appointed to the Board of Directors of Iteris. As of September 30, 2016, the Company and the significant stockholder of the Company beneficially own in the aggregate 2,600,194 shares of Iteris, which represents approximately 8.1% of Iteris’s outstanding shares.

Stockholders’ Equity

The changes in consolidated stockholders’ equity for the nine months ended September 30, 2016 are as follows:

	Common Stock Shares	Common Stock Amount	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Income	Treasury Stock	Total

Balance at January 1, 2016	13,730,562	$8,238	$24,926	$1,259	$397	$−	$34,820
Common stock option exercised and issued	24,187	15	15	−	−	−	30
Share-based compensation expense	−	−	42	−	−	−	42
Realized tax benefit from stock option exercise	−	−	393	−	−	−	393
Dividends paid	−	−	−	(2,472)	−	−	(2,472)
Net income	−	−	−	2,597	−	−	2,597
Unrealized gain on available- for-sales securities, net of tax	−	−	−	−	1,664	−	1,664
Repurchase of common stock	−	−	−	−	−	(83)	(83)
Balance at September 30, 2016	13,754,749	$8,253	$25,376	$1,384	$2,061	$(83)	$36,991

Income per Share

The following table sets forth the computation of basic and diluted income per share:

	Three Months Ended		Nine Months Ended
	September 30, 2016	September 30, 2015	September 30, 2016	September 30, 2015
Numerator:
Net income (numerator for basic and diluted earnings per share)	$719	$212	$2,597	$829
Denominator:
Denominator for basic earnings per share weighted average shares	13,741,170	13,718,396	13,735,361	13,699,355

Effect of dilutive securities:
Options	95,134	75,880	89,895	158,392

Denominator:
Denominator for diluted earnings per share weighted average shares	13,836,303	13,794,276	13,825,255	13,857,746


Basic income per share	$0.05	$0.02	$0.19	$0.06
Diluted income per share	$0.05	$0.02	$0.19	$0.06

10.

Non-Cash Share-Based Employee Compensation

The Company has employee and non-employee director stock option programs. Related to these programs, the Company recorded non-cash share-based employee compensation expense of $16 and $42, respectively, for the three and nine months ended September 30, 2016, compared with $16 and $33, respectively, for the same periods last year. The Company considers its non-cash share-based employee compensation expenses as a component of 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 a stock option grant. The non-cash share-based employee compensation expense recorded in the three and nine months ended September 30, 2016 was calculated using certain assumptions. Such assumptions are described more comprehensively in Note 10 (Share-Based Employee Compensation) of the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

A summary of activity under the Company’s stock option plans during the nine months ended September 30, 2016 is presented below:

As of January 1, 2016	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 ($)

Outstanding	291,936	4.07	-	2.68	-
Vested	276,936	4.00	-	2.72	-
Nonvested	15,000	5.35	-	1.93	-
Period activity
Issued	80,000	4.01	-	2.08	-
Exercised	28,000	1.81	-	0.99	-
Forfeited	-	-	-	-	-
Expired	32,936	11.40	-	9.16	-
As of September 30, 2016
Outstanding	311,000	3.48	4.45	2.00	581,200
Vested	231,000	3.30	3.15	1.97	474,800
Nonvested	80,000	4.01	8.21	2.08	106,400

11.

Commitments and Contingencies

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 September 30, 2016.

Purchase Commitments

As of September 30, 2016, the Company had purchase orders to suppliers for inventory of approximately $3,794.

Significant Customers

Sales to United States government agencies represented approximately $9,227 (62.0%) and $26,012 (59.2%) of the Company’s total sales for the three and nine months ended September 30, 2016, respectively, compared with approximately $3,539 (46.0%) and $9,809 (42.8%), respectively, for the same periods last year. Accounts receivable from agencies of the United States government were $3,475 as of September 30, 2016, compared with approximately $1,896 at the same date last year.

12.

Debt

The Company has a collateralized revolving credit facility with Silicon Valley Bank with maximum borrowing availability of $2,000 (subject to a borrowing base) and a maturity date of December 28, 2016. As of September 30, 2016, the Company was in compliance with all covenants under the loan and security agreement governing this revolving credit facility. For a description of such covenants and the other terms and conditions of the loan and security agreement, reference is made to Note 6 (Debt) of the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2015. As of September 30, 2016, there were no borrowings outstanding under the revolving credit facility and there was $2,000 of borrowing available under the revolving credit facility.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Reported dollar amounts in management’s discussion and analysis are disclosed in millions or as whole dollar amounts. The management’s discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes thereto of RELM Wireless Corporation (the “Company,” “we,” “our,” or “us”) for the three and nine months ended September 30, 2016 and 2015, as well our consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

SPECIAL NOTE CONCERNING

FORWARD-LOOKING STATEMENTS

We believe that it is important to communicate our future expectations to our security holders and to the public. This report, therefore, contains statements about future events and expectations which are “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including the statements about our plans, objectives, expectations and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You can expect to identify these statements by forward-looking words such as “may,” “might,” “could,” “would,” ”will,” “anticipate,” “believe,” “plan,” “estimate,” “project,” “expect,” “intend,” “seek” and other similar expressions. Any statement contained in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved.

Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and in our subsequent filings with the Securities and Exchange Commission, and include, among others, the following:

●

changes or advances in technology;

●

the success of our Land Mobile Radio (“LMR”) product line;

●

competition in the land mobile radio industry;

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general economic and business conditions, including federal, state and local government budget deficits and spending limitations;

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the availability, terms and deployment of capital;

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reliance on contract manufacturers and suppliers;

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heavy reliance on sales to agencies of the United States government;

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our ability to utilize deferred tax assets;

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retention of executive officers and key personnel;

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our ability to manage our growth;

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our ability to identify potential candidates for, and consummate, acquisition or investment transactions, and risks incumbent to being a minority interest stockholder in a corporation;

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impact of our investment strategy;

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government regulation;

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our business with manufacturers located in other countries;

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our inventory and debt levels;

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protection of our intellectual property rights;

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fluctuation in our operating results;

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acts of war or terrorism, natural disasters and other catastrophic events;

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any infringement claims;

●

data security breaches and other factors impacting our technology systems;

●

availability of adequate insurance coverage;

●

maintenance of our NYSE MKT listing; and

●

the effect on our stock price and ability to raise equity capital of future sales of shares of our common stock.

We assume no obligation to publicly update or revise any forward-looking statements made in this report, whether as a result of new information, future events, changes in assumptions or otherwise, after the date of this report. Readers are cautioned not to place undue reliance on these forward-looking statements.

Executive Overview

Our Business

We design, manufacture and market two-way land mobile radios, repeaters, base stations, and related components and subsystems.

Two-way land mobile radios can be hand-held (portable) or installed in vehicles (mobile). Repeaters expand the range of two-way land mobile radios, enabling them to operate over a wider area. Base station components and subsystems are installed at radio transmitter sites to improve performance by enhancing the signal and reducing or eliminating signal interference and enabling the use of one antenna for both transmission and reception. We incorporate both analog and digital technologies in our products. Our digital technology is compliant with the Project 25 standard of the Association of Public Communications Officials (“APCO Project 25,” or “P-25”).

We offer products under two brand names: BK Radio and RELM. Generally, BK Radio-branded products serve the government and public safety market, while RELM-branded products serve the business and industrial market.

Third Quarter and Nine Months Summary

For the three and nine months ended September 30, 2016, our financial and operating results improved compared with the same periods of last year. Total sales and sales of digital products for both periods increased significantly, which was attributed primarily to our contract with the U.S. Transportation Security Administration (“TSA”). Growth in sales was the primary catalyst behind improved operating income and positive cash flow. Also, in the second quarter we announced and began implementing a capital return program. As part of the program we paid quarterly dividends of $0.09 per share in June and September, and repurchased 15,100 of our shares since the inception of the program.

For the three months ended September 30, 2016, net sales increased 93.7% to approximately $14.7 million, compared with approximately $7.6 million for the same quarter last year. Sales of P-25 digital products for the third quarter of 2016 increased 85.6% to approximately $9.7 million (65.7% of total sales), compared with approximately $5.1 million (66.4% of total sales) for the same quarter last year.

For the nine months ended September 30, 2016, net sales increased 90.9% to approximately $43.5 million, compared with approximately $22.8 million for the same period last year. Sales of P-25 digital products for the nine months ended September 30, 2016 increased 79.3% to approximately $28.1 million (64.6% of total sales), compared with approximately $15.5 million (68.1% of total sales) for the same period last year.

Gross profit margins as a percentage of sales for the third quarter and nine months ended September 30, 2016 totaled approximately 31.4% and 32.3%, respectively, compared with 45.8% and 42.0% for the same periods last year. The comparative change in gross profit margins was attributed primarily to competitive factors associated with the TSA contract and delivery orders.

For the three months ended September 30, 2016, selling, general and administrative expenses (“SG&A”) totaled approximately $3.5 million (24.1% of sales), compared with approximately $3.2 million (41.9% of sales) for the same quarter last year. For the nine months ended September 30, 2016, SG&A totaled approximately $10.1 million (23.3% of sales), compared with approximately $8.4 million (36.9% of sales) for the same period last year.

Pretax income for the three months ended September 30, 2016 totaled approximately $1.1 million, an increase of approximately $787,000, compared with approximately $297,000 for the same quarter last year. For the nine month period, pretax income increased approximately 233.0% to $4.0 million, compared with $1.2 million for the same period last year.

For the three and nine months ended September 30, 2016, income tax expense totaled approximately $365,000 and $1,355,000, respectively, compared with $85,000 and $358,000, respectively, for the same periods last year. Our income tax expense is largely non-cash due to utilization of our net operating loss carryforwards (“NOLs”).

Net income for the three months ended September 30, 2016 totaled approximately $719,000 ($0.05 per basic and diluted share), an increase of approximately $507,000 compared with same quarter last year. For the nine months ended September 30, 2016 net income totaled approximately $2.6 million ($0.19 per basic and diluted share), an increase of approximately $1.8 million from the same period last year.

As of September 30, 2016, working capital totaled approximately $24.3 million, of which approximately $14.9 million was comprised of cash and cash equivalents, and trade receivables. As of December 31, 2015, working capital totaled approximately $23.9 million, of which approximately $8.8 million was comprised of cash and cash equivalents, and trade receivables.

Results of Operations

As an aid to understanding our operating results for the periods covered by this report, the following table shows selected items from our condensed consolidated statements of income expressed as a percentage of sales:

	Percentage of SalesThree Months Ended		Percentage of SalesNine Months Ended
	September 30,2016	September 30,2015	September 30,2016	September 30,2015

Sales	100.0%	100.0%	100.0%	100.0%
Cost of products	(68.6)	(54.2)	(67.7)	(58.0)
Gross margin	31.4	45.8	32.3	42.0
Selling, general and administrative expenses	(24.1)	(41.9)	(23.3)	(36.9)
Net Interest income	0.0	0.0	0.0	0.0
Other income (expense)	0.0	0.0	0.0	0.2
Income before income taxes	7.3	3.9	9.0	5.3
Income tax expense	(2.5)	(1.1)	(3.0)	(1.6)
Net income	4.8%	2.8%	6.0%	3.7%

Net Sales

For the third quarter ended September 30, 2016, net sales increased 93.7% to approximately $14.7 million, compared with approximately $7.6 million for the same quarter last year. Sales of P-25 digital products for the third quarter of 2016 increased 85.6% to approximately $9.7 million (65.7% of total sales), compared with approximately $5.1 million (66.4% of total sales) for the same quarter last year.

For the nine months ended September 30, 2016, net sales increased 90.9% to approximately $43.5 million, compared with approximately $22.8 million for the same period last year. Sales of P-25 digital products for the quarter increased 79.3% to approximately $28.1 million (64.6% of total sales), compared with approximately $15.5 million (68.1% of total sales) for the same period last year.

The comparative increase in total sales and sales of digital products for the third quarter was attributed primarily to previously announced orders from the TSA. Product shipments related to these orders commenced in the first quarter of 2016. As of September 30, 2016, all TSA equipment orders were fulfilled. In the third quarter our sales were supplemented by state agencies and legacy federal customers, fueled in part by wildland fire suppression efforts. Looking forward, requests for quotes from prospective new customers and our funnel of sales prospects remain encouraging.

Cost of Products and Gross Profit Margin

Gross profit margin as a percentage of sales for the third quarter ended September 30, 2016 was 31.4%, compared with 45.8% for last year’s third quarter. For the nine months ended September 30, 2016, gross profit margin as a percentage of sales was 32.3%, compared with 42.0% for the same period last year.

Our cost of products and gross profit margin are derived primarily from material, labor and overhead costs, product mix, manufacturing volumes and pricing. Compared to the same periods last year, the decrease in gross margins for the third quarter and nine months ended September 30, 2016 is attributed primarily to competitive factors associated with the TSA orders, which comprised a significant portion of our sales for both periods. The gross profit margins realized from our product sales to customers other than TSA were relatively consistent with previous quarters.

We continue to utilize contract manufacturing relationships to maximize production efficiencies and minimize material and labor costs. We also regularly consider manufacturing alternatives to improve quality, speed and costs. We anticipate that our current contract manufacturing relationships or comparable alternatives will be available to us in the future. We believe gross margin improvements can be realized by leveraging increased sales volumes and manufacturing efficiencies. We may, however, encounter product cost and competitive pricing pressures in the future. The extent of their impact on gross margins, if any, is uncertain.

Selling, General and Administrative Expenses

SG&A expenses consist of marketing, sales, commissions, engineering, product development, management information systems, accounting, headquarters and non-cash share-based employee compensation expenses.

SG&A expenses for the third quarter ended September 30, 2016 were approximately $3.5 million (24.1% of sales), compared with $3.2 million (41.9% of sales) for the same quarter last year. For the nine months ended September 30, 2016, SG&A expenses totaled approximately $10.1 million (23.3% of sales), compared with $8.4 million (36.9% of sales) for the same period last year.

Engineering and product development expenses for the third quarter of 2016 totaled approximately $1.1 million (7.8% of total sales), compared with approximately $1.0 million (13.3% of total sales) for the same quarter last year. For the nine month period engineering and product development expenses totaled approximately $3.2 million (7.3% of sales), compared with approximately $2.8 million (12.4% of sales) for the same period last year. Additional staff-related expenses and new product development projects were partially offset by decreases in amortization of capitalized software.

Marketing and selling expenses for the third quarter of 2016 totaled approximately $1.5million (10.5% of sales), compared with $1.2 million (15.8% of sales) for the third quarter last year. For the nine month period, marketing and selling expenses totaled approximately $4.4 million (10.0% of sales), compared with $3.2 million (14.0% of sales) for the same period last year. The increase for both periods was attributed primarily to incentive compensation, which correlates to sales performance. We have also invested in sales staff and initiatives to capture more new opportunities and drive sales growth.

General and administrative expenses for the third quarter of 2016 totaled approximately $855,000 (5.8% of total sales), compared with approximately $975,000 (12.8% of total sales) for the same quarter last year. For the nine month period, general and administrative expenses totaled approximately $2.6 million (5.9% of sales), compared with $2.4 million (10.6% of sales) for the same period last year. The decrease for the three months and the increase for the nine months was related primarily to incentive compensation and other headquarters expenses.

Operating Income

Operating income increased for the third quarter ended September 30, 2016, totaling approximately $1.1 million (7.3% of sales), compared with $300,000 (3.9% of sales) for the same quarter last year. For the nine month period, operating income increased to approximately $3.9 million (9.1% of sales), from $1.1 million (5.0% of sales) during the same period last year. Increased operating income for both the third quarter and nine month periods of 2016 was primarily the product of sales growth and reduced gross profit margins pertaining to the TSA delivery orders.

Net Interest Income (Expense)

We realized minimal net interest income for the third quarter and nine months ended September 30, 2016, and for the comparable prior year periods. Interest expense may be incurred from time to time on outstanding borrowings under our revolving credit facility, and we earn interest income on our cash balances. The interest rate on such revolving credit facility as of September 30, 2016 was 4.00% per annum. This rate is variable based on the lender’s prime rate and our adjusted quick ratio.

Income Taxes

We recorded income tax expense of approximately $365,000 and $1,355,000 for the three and nine months ended September 30, 2016, respectively, compared with $85,000 and $358,000, respectively, for the same periods last year. Our income tax expense is primarily non-cash.

As of September 30, 2016 and 2015, our net deferred tax assets totaled approximately $3.6 million and $5.5 million, respectively, and are primarily composed of NOLs, offset by deferred tax liabilities of $1.2 million and $671,000, respectively, primarily derived from depreciation and the unrealized gain on available-for-sale securities. These NOLs total $816,000 for federal and $11.6 million for state purposes, with expirations starting in 2018 through 2030.

In order to fully utilize the net deferred tax assets, we will need to generate sufficient taxable income in future years to utilize our NOLs prior to their expiration. The Company analyzes all positive and negative evidence to determine if, based on the weight of available evidence, we are 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 our 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.

We have evaluated the available evidence and the likelihood of realizing the benefit of our net deferred tax assets. Based on our evaluation, we have concluded that based on the weight of available evidence, it is more likely than not that we will realize the benefit of our net deferred tax assets recorded at September 30, 2016. We cannot presently estimate what, if any, changes to the valuation of our deferred tax assets may be deemed appropriate in the future. If we incur future losses, it may be necessary to record additional valuation allowance related to the deferred tax assets recognized as of September 30, 2016.

Liquidity and Capital Resources

For the nine months ended September 30, 2016, net cash provided by operating activities totaled approximately $8.3 million, compared with approximately $0.1 million for the same period last year. Cash provided by operating activities was primarily related to net income, accounts payable, prepaid expenses and other current assets, customer deposits and depreciation and amortization, partially offset by accounts receivable. For the nine months ended September 30, 2016, we realized net income of approximately $2.6 million, compared with approximately $829,000 for the same period last year. Accounts payable for the nine months ended September 30, 2016 increased approximately $526,000, compared with approximately $1.2 million for the same period last year due to increasing volume and material purchases related in large part to the TSA. Prepaid expenses and other current assets decreased approximately $1.3 million related to our production and delivery of a portion of the TSA delivery orders. For the same period last year, prepaid expenses and other current assets increased by approximately $648,000. Depreciation and amortization totaled approximately $718,000 for the nine months ended September 30, 2016, compared with approximately $697,000 for the same period last year, reflecting depreciation of new equipment purchases. Accounts receivable increased approximately $2.1 million during the nine months ended September 30, 2016, compared with $950,000 for the same period last year, reflecting sales that were consummated later in the quarter that had not yet completed their collection cycle.

Cash used in investing activities for the nine months ended September 30, 2016 totaled approximately $1.8 million, $481,000 of which was related to the investment in Iteris common stock (see Note 7 to our Condensed Financial Statements in this report), and $1.3 million that was utilized for the purchase of manufacturing and engineering equipment. For the same period last year approximately $2.8 million was used primarily for the investment in Iteris common stock (see Note 7 to our Condensed Financial Statements in this report), and $878,000 was utilized for the purchase of manufacturing and engineering equipment. We anticipate that future capital expenditures will be funded through our existing cash balance and operating cash flow.

For the nine months ended September 30, 2016, approximately $2.5 million was used in financing activities, primarily related to the previously announced capital return program, which included two payments of a quarterly dividend of $0.09 per share totaling $2.5 million and stock repurchases totaling $83,000. We also received approximately $30,000 provided by the issuance of common stock upon the exercise of stock options. For the same quarter last year, approximately $76,000 was provided by financing activities, representing proceeds from the issuance of common stock upon the exercise of stock options.

We have a collateralized revolving credit facility with Silicon Valley Bank with maximum borrowing availability of $2 million and a maturity date of December 28, 2016.

As of September 30, 2016 and the date of this report, we were in compliance with all covenants under the loan and security agreement governing the revolving credit facility. For a description of such covenants and the other terms and conditions of the loan and security agreement, reference is made to Note 6 (Debt) of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

As of September 30, 2016 and the date of this report, there were no borrowings outstanding under the revolving credit facility. As of September 30, 2016 and the date of this report, there was $2.0 million of borrowing available under the revolving credit facility.

Our cash and cash equivalents balance at September 30, 2016 was approximately $8.6 million. We believe these funds combined with anticipated cash generated from operations and borrowing availability under our revolving credit facility are sufficient to meet our working capital requirements for the foreseeable future. However, the current financial and economic conditions could limit our access to credit and impair our ability to raise capital, if needed, on acceptable terms or at all. We also face other risks that could impact our business, liquidity and financial condition. For a description of these risks, see “Item 1A. Risk Factors” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Critical Accounting Policies

In response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions. These processes affect our reported revenues and current assets and are therefore critical in assessing our financial and operating status. We regularly evaluate these processes in preparing our financial statements. The processes for revenue recognition, allowance for collection of trade receivables, allowance for excess or obsolete inventory, software development and income taxes involve certain assumptions and estimates that we believe to be reasonable under present facts and circumstances. These estimates and assumptions, if incorrect, could adversely impact our operations and financial position. There were no changes during the quarter ended September 30, 2016 to our critical accounting policies as described in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (who serves as our principal financial and accounting officer) have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (Securities Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of September 30, 2016. Based on this evaluation, they have concluded that our disclosure controls and procedures were effective as of September 30, 2016.

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2016, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Reference is made to Note 11 (Commitments and Contingencies) of the Company’s Condensed Consolidated Financial Statements included elsewhere in this report for the information required by this Item.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid Per Share (1)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs (2)
07/01/16-7/31/16	2,600	$5.42	2,600	493,500
08/01/16-08/31/16	4,400	$5.59	4,400	489,100
09/01/16 – 09/30/16	4,200	$5.48	4,200	484,900
Total	11,200	$5.42	11,200

(1)

Average price paid per share of common stock repurchased is the executed price, including commissions paid to brokers.

(2)

On May 19, 2016, the Company announced that on May 18, 2016, its Board of Directors approved the repurchase of up to 500,000 shares of the Company’s common stock, from time to time, pursuant to a stock repurchase plan in conformity with the provisions of Rule 10b5-1 and Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (the “Repurchase Program”). The Repurchase Program has no termination date.

Item 6. EXHIBITS

Exhibits required to be filed by item 601 of Regulation S-K are listed in the Exhibit Index attached hereto, which is incorporated herein by this reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RELM WIRELESS CORPORATION
	(The “Registrant”)

Date: November 2, 2016	By:	/s/ David P. Storey
		David P. Storey
		President and Chief Executive Officer (Principal executive officer and duly authorized officer)


Date: November 2, 2016	By:	/s/ William P. Kelly
		William P. Kelly
		Executive Vice President and Chief Financial Officer (Principal financial and accounting officer and duly authorized officer)

Exhibit Index

Exhibit Number	Description

Exhibit 3(i)	Articles of Incorporation(1)
Exhibit 3(ii)	Certificate of Amendment to Articles of Incorporation(2)
Exhibit 3(iii)	Amended and Restated By-Laws(3)
Exhibit 3(iv)	Amendment to By-Laws, dated December 9, 2015(4)
Exhibit 31.1	Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K)
Exhibit 32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K)
Exhibit 101.INS	XBRL Instance Document
Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 101.DEF	XBRL Taxonomy Definition Linkbase Document

(1)

Incorporated by reference from Exhibit 3(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997.

(2)

Incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

(3)

Incorporated by reference from Exhibit 3(iii) to the Company’s Current Report on Form 8-K filed May 29, 2013.

(4)

Incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed December 10, 2015.

Attached files

BK Technologies Corp Reports

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