BK Technologies Corporation

Good morning, ladies and gentlemen, and welcome to the BK Technologies Corporation conference call for the first quarter 2021. This call is being recorded. All participants have been placed on a listen-only mode. Following the management's remarks, the call will be open to questions. Before turning the call over to our president, Mr. Timothy Patu, for opening remarks, I'll provide the following safe harbor statement. Statements made during this conference call that are not based on historical facts or forward-looking statements are Such statements include, but are not limited to, projections or statements of future goals and targets regarding the company's revenue and profits. 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 the BK's filings with the U.S. Securities and Exchange Commission. These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward-looking statements. I will now turn the call over to Mr. Timothy Batu, President of BK Technologies. Mr. Batu, you may begin.

Thank you, Matthew, and thanks, everyone, for joining today. I'll arrange my comments as follows. First, I'll highlight our financial results. Next, I'll spend some time providing operational updates. Then I'll turn the call over to Executive Vice President and Chief Financial Officer Bill Kelly to dive deeper into the financial results. We'll conclude by opening the call for a brief Q&A. Beginning with our financial results, Q1 revenue came in at $8.6 million compared with $10.9 million in the first quarter of last year. Revenues in Q1 were below internal expectations due in part to the timing of certain orders from our existing customers, as well as some supply chain constraints. Like many enterprises, COVID-19 has disrupted the operations of some of our customers and supply chain partners, slowing their ordering and fulfillment processes, respectively. It is important to emphasize this is not a demand issue, but rather a timing issue. Some of these orders have now been booked or are in the final procurement stage. giving us confidence that the second quarter will show growth. Even with the short-term sales decrease, our gross margins were slightly above last year, reflecting efficiencies we have driven into our manufacturing operations that have improved our utilization and absorption of manufacturing and support expenses. We also realigned our sales and marketing teams and implemented other initiatives over the past year to optimize our expense structure, reflected in our 16% reduction in SG&A in Q1 versus Q1 of last year. In short, the company's well-positioned to see margin growth as we continue to scale our business. It's important to stay focused on the big picture. Over the last four years, this business has been totally transformed. We brought in a new executive management team and a new board of directors, implemented new R&D and engineering strategies, a new product roadmap, and new manufacturing strategies. While revenue in Q1 was down compared to the previous year, primarily due to timing of orders, our new BKR 5000 is being very well received with product approvals and orders from very demanding existing and new customers alike. This is reassuring. given that we supply a critical product with life and death ramifications. The next step in our product evolution is the BKR 9000. This new product, which we expect to launch this year, has the potential to be transformative to our business. We've taken the time to listen to existing and potential customers so that we can address their needs. The key advancement of the BKR 9000 is that, for the first time, BK Technologies will have a product with multiband capabilities. This exponentially expands our potential market verticals and positions us for larger contracts. As of right now, with our existing BK products, we can go after approximately 20% of the $2.3 billion LMR addressable market. The multiband capabilities of the BKR9000 significantly expands the percentage of the addressable market we can pursue. With the addition of the BKR 9000 to our family of products, we'll be able to effectively compete in new market verticals, such as oil and gas. We'll also be able to penetrate deeper into the municipal public service market, and we'll have the capability to grab a larger piece of the police and structure fire markets, the two largest LMR market verticals. For decades, the market leader, Motorola, has had what we estimate to be over 70% market share. We firmly believe that the market is ripe for disruption. Today, we have a low single-digit market share. We project that with an increase of just a few percentage points in our market share has a potential to bring us to $100 million plus in annual revenue. Additionally, the $9,000 has even more attractive margins than our current product offerings. If you project out longer term, as we penetrate these additional verticals and the business scales, we should be able to achieve gross margins over 50%, SG&A of less than 32% of sales, and an operating margin more than 12%. There's a lot of work to do to get there, but we see a clear path to achieving that over time. I've spoken a lot about land mobile radio and our opportunity within this $2.3 billion addressable market, and there's plenty of opportunity for us within that number to drive growth. However, that said, it's important to note that part of our longer-term strategy is to look at contiguous opportunities beyond LMR that give us access to the additional areas of the $14.6 billion public safety market. For example, This could include markets such as managed services or emergency management tools and solutions or cybersecurity equipment. This is not an immediate focus, but it's important to understand our long-term objectives of further expanding addressable market beyond LMR and building BK Technologies into a much larger company for shareholders. Two key areas of focus have been product technology development and improving our manufacturing processes. On the technology development front, we've significantly enhanced our capabilities over the past few years. We recently opened and announced our new Technology Innovation Center in South Florida. The Technology Innovation Center's mission is to explore leading-edge communication technologies and leverage that in designing solutions to wide-ranging communication challenges facing today's public safety professionals. Leading the Technology Innovation Center is BK's Chief Technology Officer, Dr. Bronco Avanek, who brings with him over 30 years of technology and development experience at Motorola. He's assembled a highly skilled engineering team with deep backgrounds in a broad array of technology disciplines and extensive direct experience designing state-of-the-art communication technology solutions. We also launched several strategic initiatives several years ago, to significantly upgrade manufacturing processes. This includes bringing certain activities such as surface mount technology or SMT in-house while migrating others to U.S.-based manufacturing partners and qualified second sources for backup. This strategy allows for improved quality control and shortens development lead time while guarding against business interruptions. which ultimately yields benefits in product cost, inventory throughput, and working capital management. Additionally, we now have a more cyber secure supply chain, which is increasingly important to government agencies. Now let's dig into some of the customer traction we have seen for the BKR 5000 since we last spoke. First, we received various approvals of the new technology from customers. we received fire approval rating from the U.S. National Interagency Fire Center, or NIFC, for the BKR-5000. Our engineering team worked closely with the NIFC team to achieve the status of fire approved for interagency fire use. This authorization enables the product to be used by all federal employees and all personnel under contract with the federal government working on wildland fires and forest health protections. We received approval from the U.S. Department of the Interior, the DOI, for the BKR-5000. This complements our NFC fire approval certification, providing the necessary approval for the DOI purchases, including high-risk fire and law enforcement use. The DOI further noted that the product passed on every risk assessment code that they test. DOI agencies combined have an estimated 80,000 BK radios deployed across the nation. We've also had multiple orders for the BKR-5000 from some of the most demanding customers. We want a new strategic customer in the state of California. The Idaho Department of Lands placed the largest single order in many years, upgrading the BKR-5000. We also secured business from a new municipal fire and rescue customer in Idaho, a state that ranks second in the nation for the percentage of homes at risk from wildfires. We were awarded a new service contract by the U.S. Department of Agriculture's Forest Service for maintenance and repair of decay products. Replacing the previous service contract, this new contract extends our longstanding relationship with the Forest Service and provides us with reoccurring service revenue for many years. The BKR 5000 was selected for purchase and deployed by the Kentucky chapter of a global environmental organization with more than 1 million members in 70 countries. Alberta Health Services extended their contract. One of our key strategic objectives has been to establish a presence internationally, and this provides a foundation from which to grow our business in Canada. The Washington Department of Natural Resources, a very long-standing customer, is starting to migrate to the BKR 5000. That's a sign of their confidence in the product. Finally, highlighting our broad product platform, NIFSI purchased our KNG2 series P150 and P400 technology solutions. Unfortunately, natural disasters are only getting more common, as we've all seen over the past few years. BK provides the people on the front line with these products that they can depend on in life and death situations. We take great pride in that and look forward to getting our products in the hands of more of these heroes. I'll now turn the call over to Bill Kelly, our Executive Vice President and Chief Financial Officer, who's going to review the financial and operating highlights. Bill?

Thanks, Tim. Following is a summary of our financial and operating results for the period ending March 31st, 2021. Sales for the first quarter totaled approximately $8.6 million, compared with $10.9 million for the first quarter last year. As Tim reported, revenues in the first quarter were below internal expectations due in part to the timing of certain customer orders and delays within our supply chain. Like many enterprises, COVID-19 has disrupted the operations of some of our customers and supply chain partners, slowing their processes. As Tim mentioned, this relates to timing rather than demand. Several of these customer orders have now been booked or in the final procurement stage, giving us confidence that second quarter will yield growth. Gross profit margins as a percentage of sales for the first quarter were 36.2% compared with 35.8% for the first quarter last year. While gross profit margins for the first quarter of 2021 were materially consistent with the same quarter last year, they were adversely impacted by approximately 3.3% for one-time inventory reserves related to our legacy product line, the KNG series. Absent this impact, gross profit margins for the first quarter of 2021 would have been approximately 39.5%. Last year, we reduced manufacturing operations employment and other manufacturing-related expenses And these reductions have improved our utilization and absorption of manufacturing and support expenses. Selling general and administrative expenses, or SG&A, for the first quarter decreased approximately $770,000, or 16.2%, to approximately $4 million, which was 46.4% of sales. This compares with $4.7 million or 43.6% of sales for the same quarter last year. In the second quarter last year, excuse me, in the first quarter last year, consistent with the employment and expense reductions in our manufacturing operations, we reduced SG&A employment as well as other expenses in sales, go-to-market, engineering, and headquarters. These reductions impacted SG&A expenses, but were made later in last year's first and second quarter. We recognized an unrealized gain of $205,000 on our investment in PIH compared with an unrealized loss of $306,000 for the first quarter last year. Our net loss for the three months ended March 31st, 2021, narrowed by approximately $498,000 or 41.8% to approximately $694,000 or six cents per basic and diluted share, compared with a loss of approximately $1.2 million or nine cents per basic and diluted share for the same quarter last year. As of March 31st, 2021, Working capital totaled approximately $13.2 million, of which approximately $10.9 million is comprised of cash, cash equivalents, and trade receivables. This compares with working capital totaling approximately $15.1 million at 2020 year end, which included $13.3 million of cash, cash equivalents, and trade receivables. Our capital return program has paid 20 consecutive quarterly dividends. The last one was paid on April 26, 2021. That concludes my remarks. We will now move on to the question and answer portion of the conference call. I would like to remind everyone that we do not provide financial and operating guidance on a quarterly or annual basis. We're now ready to open the floor for questions.