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| 8-K - CURRENT REPORT - BK Technologies Corp | bkti_8k.htm |
Exhibit 99.1
BK
Technologies Corporation (BKTI)
Q2 2020
Earnings Conference Call
August
6, 2020 9 AM ET
Participants
Timothy
Vitou - President
William
Kelly - Chief Financial Officer & Secretary
Analysts
Allan
Lyons - Vestal Venture Capital Fund LLC
Presentation
Operator
Good
morning, ladies and gentlemen, and welcome to BK Technologies
Corporation conference call for the second quarter and 6 months
ended June 30, 2020. This call is being recorded. All participants
have been placed in a listen-only mode. Following
management’s remarks, the call will be open to
questions.
Before
turning the call over to Mr. Vitou for opening remarks, I will
provide the following safe harbor statements.
Statements
made during this conference call that are not based on historical
facts are forward-looking statements. These statements are subject
to known and unknown factors and risks. The company’s actual
results, performance or achievements may differ materially from
those expressed or implied by these forward-looking
statements.
And
some of the factors and risks that could cause or contribute to
such material differences have been described in yesterday’s
press release and in BK’s filings with the SEC. These
statements are based on information and understandings that are
believed to be accurate as of today, August 6, 2020, and we do not
undertake any duty to update forward-looking
statements.
I will
now turn the call over to Mr. Timothy Vitou, President of BK
Technologies. Mr. Vitou, you may begin.
Timothy Vitou - President
Thank
you, Taren, and good morning, everyone. Welcome to the BK
Technologies investor conference call for the second quarter and 6
months ended June 30, 2020. I’ll provide some comments about
the business before Bill takes us through the financial and
operating results.
All
things considered, I believe the first half of this year has been
encouraging with numerous positives. Regarding our current status,
as it relates to the COVID-19 pandemic, we have remained open and
operational as an essential business, supporting first responders
and we’ve been able to produce the products necessary to
timely fulfill customer orders.
While
doing so, we have implemented policies consistent with best safety
practices, including social distancing and remote work for those
able to do so effectively and efficiently. To date, 1 staff member
has been tested positive for COVID-19. This employee has been
quarantined in accordance with our policies and best practices, and
is currently remotely working.
During
the first half of this year, BK’s strength and ability to
adapt quickly has been tested and clearly demonstrated. While
giving a glimpse of the potential we have for future growth as we
introduce new products, enter new markets and expand our market
share. The encouraging nature of our first half includes a wide
range of initiatives and actions company-wide.
Even
while faced with a global pandemic, our sales for the first 6
months this year remain consistent with last year’s 6-month
sales and improved from sales during the second half of last
year.
As an
added benefit, these sales included noteworthy success in securing
sales to new customers and markets, such as the recently announced
$4.2 million contract awarded from an agency of the U.S. Department
of Energy. The award is BK’s first with this customer and our
initial meaningful penetration in the utility market vertical, a
market that is a strategic focus for expanding our market share and
generating sales growth.
We look
forward – I’m sorry, we took steps during the second
quarter to restructure many of our organizations with an eye
towards streamlining functions and reducing their costs. This
included among other actions an 18% reduction in our workforce,
saving over $2.1 million in annual payroll and related employment
costs as a direct result of these actions, total operating expenses
for the second quarter of 2020 declined almost 25%.
Gross
profit margins as a percentage of sales improved to 43.6% compared
with 35.7% for the first quarter this year, and compared with 42.9%
for the second quarter last year. SG&A expenses for the second
quarter declined over 23% from last year’s second quarter.
While restructuring contributed to the expense decrease, we also
benefited from lower engineering expenses, as certain projects
reach completion and related external engineering resources were
released.
Addressing
working capital and cash flow, during the first 6 months of 2020,
we reduced our inventory by approximately 29.5%. This reduction has
been a primary contributor to positive cash flow. For the first
half of this year, we have generated cash of approximately $2.3
million. This is a $6.2 million turnaround from last year’s
6-month period.
Stable
sales performance, restructuring and expense reductions, all
combined to yield an operating loss that narrowed by over 61% for
the first half of 2020 compared with last year’s first half.
More importantly, looking ahead, we believe these actions have
significantly lowered the sales threshold at which we could
generate operating profits and positive cash flow.
Even
better, with the realization of planned growth in sales, operating
profits can be increased considerably. Sales growth for us is
likely to be driven by new products with features and functions
that are expected by today’s public safety professionals,
combined with ruggedness and quality, to perform reliably within
harsh and demanding conditions.
Our new
BKR series of professional-grade public safety radios and
accessories are planned to be the foundation upon which we can
execute our strategy for increased market share and profitable
sales growth. The design and engineering of the first model in this
series, the BKR 5000 has been completed and manufacturing is now
underway.
We’ve
begun the process of introducing the BKR 5000 to the market and
announcing its launch. Our engineering and technical resources are
now 100% focused on the most exciting member of the BKR family, the
BKR 9000, a radio with multiband capability.
As
I’ve mentioned on previous calls, we have listened to our
customer’s input and have been busy implementing design
changes to the BKR 9000 that are intended to improve its
performance metrics and add functionality. All of which we believe
will provide competitive advantages in the market. Much of the
groundwork for the BKR 9000 has been laid, and we are looking
forward toward its completion and introduction in the first half of
next year.
Multiband
products, we believe, should open the BK new markets and customers,
thereby further increasing our prospects for increased market
share. Although the COVID-19 pandemic has some uncertainty over the
next few quarters, given our positive strides, you can see why at
the outset of this call, I described the first 6 months as
encouraging.
This
concludes my overview this morning. I’ll now turn the call
over to Bill Kelly, our Chief Financial Officer, who will review
the financial and operating highlights for the second quarter and
six-month period of 2020 before returning for some closing
thoughts. Bill?
William Kelly - Chief Financial Officer &
Secretary
Thanks,
Tim. Following is a summary of our financial and operating results
for the second quarter and six months ended June 30, 2020. Net
sales for the second quarter of 2020 totaled approximately $9.9
million, compared with approximately $13.3 million for the second
quarter last year. For the six months ended June 30, 2020, net
sales totaled approximately $20.8 million, compared with $20.9
million for the six-month period last year.
Please
note that our primary customers are federal, state, county and
municipal government agencies, which are subject to contracting
budget and other factors that impact their timing and ability to
purchase equipment. Accordingly, sales to these agencies can
fluctuate from period to period. Such fluctuations are not
necessarily indicative of a trend.
Gross
profit margins as a percentage of sales for the second quarter of
2020 improved to approximately 43.6% compared with 42.9% for the
second quarter last year. For the six-month period of 2020, gross
profit margins improved to 39.5% compared with 38.9% for the
six-month period last year. The improvement in gross profit margins
for the second quarter was attributed to a more favorable mix of
product sales, combined with expense reductions associated with the
restructuring of our manufacturing operations.
For the
second quarter of 2020, selling, general and administrative
expenses were reduced by over 23% or $1.3 million from last
year’s second quarter, totaling approximately $4.4 million,
compared with $5.7 million for last year’s second quarter.
For the six months ended June 30, 2020, SG&A expenses declined
12.7% or $1.3 million to approximately $9.1 million, compared with
approximately $10.4 million for last year’s six-month
period.
The
decrease in SG&A expenses for the second quarter and six-month
period was attributable primarily to reduced engineering and
product development expenses, as certain projects reach completion,
as well as employment and expense reductions related to our
restructuring. Total operating costs expenses for the second
quarter of 2020 declined almost 25%, $3.3 million compared with
last year’s second quarter.
For the
six-month period of 2020, total operating expenses declined
approximately $1.5 million or 6.6%. For the second quarter of 2020,
we’ve recognized net other expenses totaling approximately
$238,000 related primarily to an unrealized loss on our investment
in 1347 Property Insurance Holdings. During last year’s
second quarter, we’ve recognized net other expenses totaling
$113,000.
For the
six months ended June 30, 2020, net other expenses totaled
approximately $582,000 primarily from an unrealized loss on 1347
PIH. For the same period last year, we’ve recognized net
other income of approximately $532,000, primarily from an
unrealized gain on 1347 PIH.
For the
second quarter of 2020, we reported a net loss of approximately
$302,000, or $0.02 per diluted share, compared with $247,000, or
$0.02 per diluted share for the second quarter last year. For the
six months ended June 30, 2020, our net loss narrowed to
approximately $1.5 million, or $0.12 per diluted share, compared
with approximately $1.6 million or $0.12 per diluted share for the
same period last year.
For the
first half of 2020, we reduced inventory by almost 30% or $4
million, and generated approximately $2.3 million of positive cash
flow, increasing our cash balance by over 48%. Our capital return
program has paid 17 consecutive quarterly dividends, the last one
being paid on July 20, 2020.
I’ll
now turn the call back over to Tim.
Timothy Vitou - President
Thank
you, Bill. The current business and economic climate continue to be
uncertain due to the global pandemic. During the second quarter
after a modest initial improvement, many areas in the United States
experienced an increase in COVID cases. Consequently, the reopening
of the economy has been slowed and uneven. Despite these changing
circumstances, I believe BK’s strong balance sheet, recently
restructured operations, cost reductions and new products position
the company to succeed.
We’ll
now move on to the question-and-answer portion of the conference
call. I’d like to remind everyone that we do not provide
financial and operating guidance on a quarterly or annual basis.
Taren, we’re now ready to open the floor for
questions.
Question-and-Answer Session
Operator
Thank
you. Ladies and gentlemen, the floor is now open for questions.
[Operator Instructions] We’ll take our first question from
Allan Lyons. Please go ahead.
Q: Thank you. Good morning, Tim and Bill.
William Kelly - Chief Financial Officer &
Secretary
Good
morning, Al.
Timothy Vitou - President
Good
morning, Al.
Q: Hi. First of all, congratulations on, I thought a really
good job controlling costs in a very difficult environment. Nice to
see the second quarter report in the first 6 months being as decent
as they were under the circumstances. So my question, the BKR 5000,
9000, does that open up, first of all, to customers that
you’re not able to serve now?
And
also, who’s out in the marketplace that have something, will
it be competitive to what you’re coming out
with?
Timothy Vitou - President
Let me
break that question down into 2 parts, the first part being the
5000 and 9000; does it address new markets? The answer is yes,
Allan. What the BKR 5000 primarily will be addressing is a very
large market that we believe the current KNG series doesn’t
necessarily work that well, and then that’s the structure
fire marketplace and public safety.
As you
know, we’re a very focused wildland fire and other areas of
public safety that the KNG series addresses. We believe the 5000
now opens us up to some additional marketplaces. The 9000, when it
arrives early next year or first half of next year, will address a
lot of agencies that right now currently operate in 2 or 3 spectrum
areas. So people like the federal government, there’s a lot
of agencies who have declared they only will operate with a
dual-band radio or a tri-band radio. The 9000 will address those
address markets.
Q: Okay. And what about who’s out there that you think
is – for the new products as the 5000 and then the
9000…
Timothy Vitou - President
I’m
sorry, I wrote down competition. There is competition right now in
that space. We believe that the 5000 and the 9000, because
it’s been so customer-centric designed we have got a
considerable amount of voice of customer helping us design these
radios.
We
believe in building a radio the customers need and the customers
want and customers are going to buy, and it does exactly what the
customer mission is. So we’ve done an enormous amount of work
with our customer base, both the current customers plus these new
prospects on working with them.
We
believe that radios will compete head to head with anything in the
marketplace out there today.
Q: Okay, thank you.
Just
wondered if you can give some color to the [I-Task] [ph] Financial
LLC consulting agreement that’s now suspended. What was the
– I mean, it’s real expensive, and of course,
it’s not a related-party transaction. Just trying to
understand why this was entered into, I know what they do. I looked
at – come up and why it started when suspended. So maybe you
can give us a little bit more background as to why it was entered
into. Thanks.
William Kelly - Chief Financial Officer &
Secretary
Al,
this is Bill. That was entered into the parties that [I-Task] [ph]
have some specific expertise in registration statements and those
types of activities, which we don’t on board. We engage them
to assist us in sort of evaluating and proceeding with that sort of
activity. It’s very early and we’ve since suspended
that as it’s mentioned in the disclosure.
The
time to resume that is uncertain at this point, but, of course, as
it happens, as that proceeds, other disclosures will be made, but
at this point there isn’t any information beyond
that.
Q: Okay, all right. Well, thank you, and good luck with the
second half. It sounds kind of exciting over the next 12 months,
depending on the environment, of course. Thanks.
William Kelly - Chief Financial Officer &
Secretary
Sure.
Timothy Vitou - President
Thank
you, Al.
William Kelly - Chief Financial Officer &
Secretary
Thanks,
Al.
Operator
We’ll
take our next question from [Ed Schultheiss] [ph]. Please go
ahead.
Q - Unidentified Analyst: Okay, good morning, Tim and Bill.
I got a…
Timothy Vitou - President
Good
morning, Ed.
Q - Unidentified Analyst: First off, thanks for –
yeah, thanks for taking my questions here. First one I have is on
the sales or the order flow for the second quarter. Yeah, many
companies indicated that April and May were relatively slow and
things tended to more normalize in the June period. Would you say
that’s the same thing that happened with BK?
Timothy Vitou - President
I
think, Ed, that summarizes it pretty well. As Bill pointed out in
his commentary, our customers, as you all know, are city, county,
state and fed agencies. We didn’t see a lot of business
evaporate. What we saw was a lot of business pushed out. It was
more of a delayed reaction. So as these government agencies kind of
got their arms wrapped around COVID, and how these cities and
counties and states were going to respond, and the federal
government was going to respond, it put a focus on some of their
purchases that just delayed them, maybe a quarter or
two.
We
don’t see those as – that business as evaporated or
gone away. We just think it’s going to be delayed. So we did
see a little bit of fall off early in the COVID pandemic and trying
to address it.
One of
those difficulties we had was the inability of our salespeople to
actually go out face-to-face and see customers that you read about
all day every day in the news about the difficulty in transacting
business.
So as
some of that starts to lighten up, we were able to still continue
doing business through things like Zoom and other remote tools that
we’ve utilized. It’s caused our sales and marketing
team to be far more creative. I think that this has been a
phenomenally good test of our ability to reach our customers and
when times do normalize, I think, we’ll be able to take what
we’ve learned during the pandemic and utilize that to our
benefit, when we can actually go back out and see customers and
continue utilizing these tools we’ve been using.
Q - Unidentified Analyst: Okay, good. Okay. The next
question I have then is on the R&D that’s come down quite
a bit this quarter, and you’ve indicated that, I guess, you
were outsourcing some of the development of the new radio to BKR
5000, and now you’ve, I guess, brought the rest of that
in-house. You’ve also indicated that you’ll be
refreshing other models. Would you expect to be doing more of that
in-house? Or will some of that also be outsourced?
Timothy Vitou - President
When we
– great question. When we announced the arrival of our CTO,
Dr. Branko Avanic, he has done a phenomenal job rebuilding our
engineering staff. We plan on doing the vast majority of any
R&D in-house with these new engineering talented professionals
that we have. So that is going to help our engineering cost in our
R&D structure. From time to time, we’ll have some outside
resources assisting where Dr. Branko believes he need it, but
primarily the majority of our engineering heavy lifting will be
done in-house.
Q - Unidentified Analyst: Okay, tremendous. Okay. And then
next question I have is on the recent order you have from the
Department of Energy. Is that something where you would expect the
annual orders on something like that? Or is this something that you
were able to place this order and they may be done for quite some
time?
Timothy Vitou - President
Good,
another great question, Ed. The Department of Energy, the DOE has
been a target of ours for a little while. We’ve been working
with these customers now for a couple of years. Since they are a
new vertical for us, they didn’t have a lot of history with
us. It took quite a while for them to test and to see how our
radios do compete with the competition that they were currently
buying the incumbents. What I’m excited about, Ed, is that
this opportunity opens up a new sales vertical, we do anticipate in
the future being able to secure additional business in that
vertical in the DOE.
And I
believe the new products going back to an earlier question that BKR
5000 and 9000 are being designed with that in mind. So that not
only is our current radio, the KNG-Series capable of competing in
that arena, we believe the new radios will be able to compete just
as well. So we’re excited about the entire utility
vertical.
Q - Unidentified Analyst: Okay, tremendous. And then the
last question I have, I guess it’s more of a commentary,
I’m looking for you. Is it the state and local budgets,
obviously with COVID out there? We hear the budgets across the
country are coming under a lot of pressure here. Do you think that
that’s going to be more of a detriment to you where
they’re not going to be ordering radios? Or do you think that
actually may be a benefit where they’ll be coming to BK
Technologies looking for a high-quality product at a more
reasonable price?
Timothy Vitou - President
You
sound like one of my sales guys, right. We – I believe that
as the budgets do get tightened and as there is still a lingering
effect with COVID and the effect it’s having on budgets at
the city, county and state level as well as the federal. We believe
we have one of the best value propositions in land mobile radio. We
make a very high-quality radio at a very fair price.
Now as
the budgets continue to get squeezed, we believe we’re in a
position where if we can present the facts to our customer base
that allows us to show that value proposition and the customer
truly shops, he may find that BK provides a radio or a solution
that fits their budget better than maybe the competition is
prepared to do. So in that view, I could see the case where even
though the budgets are getting squeezed, the customer base may be
forced to look at alternatives to their current product. And BK
comes out on top.
Operator
Thank
you, ladies and gentlemen. That will conclude our
question-and-answer session for today. I’ll now turn the
floor back over to Mr. Vitou.
Timothy Vitou - President
Thank
you, Taren, and thank you all for participating in today’s
call. We look forward to talking with you again when we report our
Q3 2020 results in November of 2020. All the best to all of you and
have a great day everyone.
Operator
Ladies
and gentlemen, this does conclude today’s teleconference. We
thank you for your participation. You may disconnect your lines at
this time and have a great day.