Notes to Condensed Consolidated Financial Statements
Unaudited
(in thousands, except share and per share data and
percentages)
1.
Condensed
Consolidated Financial Statements
Basis of Presentation
The
condensed consolidated balance sheet as of September 30, 2018, the
condensed consolidated statements of income and comprehensive
income for the three and nine months ended September 30, 2018 and
2017 and the condensed consolidated statements of cash flows for
the nine months ended September 30, 2018 and 2017 have been
prepared by BK Technologies, Inc. (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, 2017 has been derived from the
Company’s audited consolidated financial statements at that
date.
Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S.
GAAP”) have been condensed or omitted. 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, 2017, as filed with the
Securities and Exchange Commission (“SEC”). The results
of operations for the three and nine months ended September 30,
2018 are not necessarily indicative of the operating results for a
full year.
Effective January
1, 2018, the Company adopted Accounting Standards Update
(“ASU”) No. 2014-09, Revenue from Contracts with
Customers and the additional related ASUs (ASC “606”),
which replaces existing revenue guidance and outlines a single set
of comprehensive principles for recognizing revenue under GAAP. The
Company elected the modified retrospective method upon adoption
with no impact to the opening retained earnings or revenue
reported. These standards provide guidance on recognizing revenue,
including a five-step method to determine when revenue recognition
is appropriate.
Step 1:
Identify the contract with the customer
Step 2:
Identify the performance obligations in the contract
Step 3:
Determine the transaction price
Step 4:
Allocate the transaction price to the performance
obligations
Step 5:
Recognize revenue as the Company satisfies a performance
obligation
ASC 606
provides that revenue is recognized when control of the promised
goods or services is transferred to customers at an amount that
reflects the consideration to which the entity expects to be
entitled to in exchange for those goods or services. We generally
satisfy performance obligations upon shipment of the product or
service to the customer. This is consistent with the time in which
the customer obtains control of the product or service.
For extended warranties,
sales revenue associated with the warranty is deferred at the time
of sale and later recognized on a straight-line basis over the
extended warranty period.
Some contracts include
installation services, which are completed in a short period of
time and the revenue is recognized when the installation is
complete.
Principles of Consolidation
The
Company consolidates entities in which it has a controlling
financial interest. The Company determines whether it has a
controlling financial interest in an entity by first evaluating
whether the entity is a variable interest entity
(“VIE”) or a voting interest entity.
VIEs
are entities in which (i) the total equity investment at risk is
not sufficient to enable the entity to finance its activities
independently, or (ii) the at-risk equity holders do not have the
normal characteristics of a controlling financial interest. A
controlling financial interest in a VIE is present when an
enterprise has one or more variable interests that have both (i)
the power to direct the activities of the VIE that most
significantly impact the VIE’s economic performance, and (ii)
the obligation to absorb losses of the VIE or the right to receive
benefits from the VIE that could potentially be significant to the
VIE. The enterprise with a controlling financial interest is the
primary beneficiary and consolidates the VIE.
Voting
interest entities lack one or more of the characteristics of a VIE.
The usual condition for a controlling financial interest is
ownership of a majority voting interest for a corporation or a
majority of kick-out or participating rights for a limited
partnership.
When
the Company does not have a controlling financial interest in an
entity but exerts significant influence over the entity’s
operating and financial policies (generally defined as owning a
voting or economic interest of between 20% to 50%), the
Company’s investment is accounted for under the equity method
of accounting. If the Company does not have a controlling financial
interest in, or exert significant influence over, an entity, the
Company accounts for its investment at fair value, if the fair
value option was elected, or at cost.
The
Company has an investment in 1347 Property Insurance Holdings,
Inc., made through FGI 1347 Holdings, LP, a consolidated
VIE.
Fair Value
The
Company’s financial instruments consist of cash and cash
equivalents, trade accounts receivable, investment in securities,
accounts payable, accrued expenses and other liabilities. As of
September 30, 2018 and December 31, 2017, 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 investment in securities.
There were no transfers of investment
in securities between Level 1 and Level 2 during the nine months
ended September 30, 2018.
Available-For-Sale Securities
Investments
reported on the December 31, 2017 balance sheet consisted of
marketable equity securities of a publicly held company. As of
December 31, 2017, the investment cost was $2,402. On January 1,
2018, the Company adopted Accounting Standards Update
(“ASU”) 2016-01 “Financial Instruments,”
which amended the guidance in U.S. GAAP regarding the
classification and measurement of financial instruments. Changes to
the prior guidance primarily affected 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 clarified guidance related to the
valuation allowance assessment when recognizing deferred tax assets
resulting from unrealized losses on available-for-sale debt
securities. Upon its adoption, the Company applied 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
was effective. On January 1, 2018, the Company recognized
approximately $4,300 of net unrealized gain in its accumulated
deficit balance. During the first quarter of 2018, the Company sold
1,317,503 shares of Iteris, Inc. (Nasdaq: ITI), which cost $2,402,
for approximately $8,335 of proceeds and reported a loss on the
sales of approximately $849.
Other Comprehensive Income
Other
comprehensive income consists of net income and unrealized gain on
available-for-sale securities, net of taxes.
Recently Adopted Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued ASU 2014-09 “Revenue from Contracts with
Customers,” which provided for a single, principles-based
model for revenue recognition and replaced the existing revenue
recognition guidance, became effective for annual and interim
periods beginning on or after December 15, 2017, and replaced most
existing revenue recognition guidance under U.S. GAAP. This ASU
requires additional disclosures about the nature, amount, timing
and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgements and estimates and
changes in those estimates. It permits the use of either a modified
retrospective or cumulative effect transition method. The Company
adopted ASU 2014-09 in the first quarter of 2018 and applied the
modified retrospective approach. Because the Company’s
primary source of revenues is from shipments of products, the
adoption of this new guidance did not have any impact on its
consolidated financial statements and related disclosures. See Note
1 for additional information.
In
January 2016, the FASB issued ASU 2016-01 “Financial
Instruments,” which amended the guidance in U.S. GAAP on the
classification and measurement of financial instruments. Changes
primarily affected 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 clarified 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 became effective for fiscal years and interim periods
beginning after December 15, 2017, and upon adoption, an entity was
required to 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. The Company
adopted the new guidance, which had a material impact on its
retained earnings, as the Company reclassified approximately $4,300
of unrealized gain on investment securities that was previously
classified in other comprehensive income.
Recent Accounting Pronouncements
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 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
expects this will result in the recognition of right-of-use assets
and lease liabilities not currently recorded on the consolidated
financial statements under existing accounting guidance. The
Company is still evaluating all the Company’s contractual
arrangements; however, based on the preliminary work completed, the
Company expects that the adoption of ASU 2016-02 will not have a
material impact on the Company’s consolidated financial
statements.
In
August 2018, the SEC adopted the final rule under SEC Release No.
33-10532, Disclosure Update and Simplification, amending certain
disclosure requirements that were redundant, duplicative,
overlapping, outdated or superseded. In addition, the amendments
expanded the disclosure requirements on the analysis of
stockholders' equity for interim financial statements. Under the
amendments, an analysis of changes in each caption of stockholders'
equity presented in the balance sheet must be provided in a note or
separate statement. The analysis should present a reconciliation of
the beginning balance to the ending balance of each period for
which a statement of comprehensive income is required to be filed.
This final rule is effective for all filings made on or after
November 5, 2018. Given the effective date and the proximity to
most filers’ quarterly reports, the SEC is not objecting to
filers deferring the presentation of interim changes in
stockholders’ equity in their Forms 10-Q until the quarter
that begins after the date of adoption, November 5, 2018. We intend
to present interim changes in stockholders’ equity beginning
with our quarterly report on Form 10-Q for the first quarter of
2019
The
Company does not discuss recent pronouncements that are not
anticipated to have an impact on or are unrelated to its financial
condition, results of operations, cash flows or
disclosures.
2.
Significant
Events and Transactions
On
September 27, 2018, the Company announced that it was selected as a
supplier under the Subscriber Unit Radio and Accessory Contract
(“SURAC”) issued by the U.S. Army, and received its
first task orders under the contract totaling approximately $800.
The task orders were for the Company’s UHF portable radios
and related accessories, which are anticipated to be delivered
during the fourth quarter of 2018. The SURAC contract is intended
to serve as the U.S. Army’s primary contract vehicle for
procuring Project 25 standard of the Association of Public-Safety
Communications Officials (P-25) digital communications equipment.
The Company was one of five companies selected by the U.S. Army.
The maximum total value of the contract is $495,000 over a
five-year period that commenced on June 18, 2018, and ends on June
18, 2023. The contract does not specify purchase dates or
quantities of equipment from any particular named supplier, and
there is no assurance that the Company will receive any additional
orders.
In July
2018, the Transportation Security Administration
(“TSA”) of the U.S. Department of Homeland Security
exercised its third one-year option, extending its contract with
the Company for an additional year to September 27, 2019. The
option provides for the purchase of up to $2,000 of the
Company’s products; however, precise dates for quantities or
deliveries are not specified. The original contract awarded in
September 2015 totaled $26,200, with $15,500 in firm delivery
orders and $10,700 in potential option exercises. Separate from the
contract extension, the TSA also ordered approximately $2,000 of
additional equipment and services for deployment at various
domestic airports.
Pursuant to the
Company’s capital return program, on September 6, 2018, the
Company’s Board of Directors declared a quarterly dividend of
$0.02 per share of the Company’s common stock to stockholders
of record as of October 1, 2018. These dividends were paid on
October 15, 2018.
3.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts on trade receivables was
approximately $50 on gross trade receivables of $7,457 and $5,574
at September 30, 2018 and December 31, 2017, 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.
The
components of inventories, net of allowances for slow-moving,
excess or obsolete inventory, consist of the
following:
|
|
|
|
|
Finished
goods
|
$
2,137
|
$
2,825
|
|
Work in
process
|
4,432
|
7,111
|
|
Raw
materials
|
4,119
|
4,422
|
|
|
$
10,688
|
$
14,358
|
Allowances for
slow-moving, excess, or obsolete inventory are used to state the
Company’s inventories at the lower of cost or net realizable
value. The allowances were approximately $758 at September 30,
2018, compared with approximately $789 at December 31,
2017.
Income
tax expense totaling approximately $17 and $200 has been recorded
for the three and nine months ended September 30, 2018,
respectively, compared with $252 and $353, respectively, for the
same periods last year.
The
Company’s income tax provision is based on management’s
estimate of the effective tax rate for the full year. The tax
provision in any period will be affected by, among other things,
permanent, as well as temporary differences in the deductibility of
certain items, in addition to changes in tax legislation. As a
result, the Company may experience significant fluctuations in the
effective book tax rate (that is, tax expense divided by pre-tax
book income) from period to period. For 2018, the Company
generally expects its effective tax rate to decline compared to
2017, primarily due to the implementation of the Tax Cuts and Jobs
Act enacted in December 2017, which, among other things, reduced
the U.S. federal corporate tax rate from 35% to
21%.
As of
September 30, 2018 and December 31, 2017, the Company’s net
deferred tax assets totaled approximately $3,122 and $3,317,
respectively, and were primarily composed of net operating loss
carryforwards (“NOLs”) and research and development
costs and tax credits. As of September 30, 2018, these NOLs
totaled approximately $5,216 for federal and $12,766 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 analyzes
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.
Based
on management’s analysis of all available evidence, both
positive and negative, the Company’s management has concluded
that the Company does not have the ability to generate sufficient
taxable income in the necessary period to utilize the entire
benefit for the deferred tax asset. Management estimated that as of
September 30, 2018, it is more likely than not that approximately
$83 of the Company’s deferred tax asset will not be realized
due to the inability to generate sufficient Florida taxable income
in the necessary period to fully utilize its Florida NOLs. 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,
2018.
6.
Investment
in Securities
The
Company has an investment in a limited partnership, FGI 1347
Holdings, LP, of which the Company is the sole limited partner. FGI
1347 Holdings, LP, was established for the purpose of investing in
securities.
As
of September 30, 2018, the Company indirectly held approximately
$221 in cash and 477,282 shares of 1347 Property Insurance
Holdings, Inc. (Nasdaq: PIH) with fair value of $3,198, through an
investment in FGI 1347 Holdings, LP. These shares were purchased in
March and May 2018 for approximately $3,741. For the three and nine
months ended September 30, 2018, the Company recognized an
unrealized loss on the investment of approximately $191 and $543,
respectively.
Affiliates of
Fundamental Global Investors, LLC serve as the general partner and
the investment manager of FGI 1347 Holdings, LP, and the Company is
the sole limited partner. As of September 30, 2018, the Company and
the affiliates of Fundamental Global Investors, LLC, including
without limitation Ballantyne Strong, Inc., beneficially owned in
the aggregate 2,714,362 shares of PIH’s common stock,
representing approximately 45.4% of PIH’s outstanding shares.
Fundamental Global with its affiliates is the largest stockholder
of the Company. Mr. Kyle Cerminara, Chairman of the Company’s
Board of Directors, is Chief Executive Officer, Co-Founder and
Partner of Fundamental Global Investors, LLC and serves as Chief
Executive Officer and Chairman of the Board of Directors of
Ballantyne Strong. Mr. Lewis M. Johnson, Co-Chairman of the
Company, is President, Co-Founder and Partner of Fundamental Global
Investors, LLC and serves as a director of Ballantyne Strong.
Messrs. Cerminara and Johnson also serve as Chairman and
Co-Chairman, respectively, of the Board of Directors of
PIH.
The
changes in consolidated stockholders’ equity for the nine
months ended September 30, 2018 are as follows:
|
|
|
|
Additional
Paid-In Capital
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
Balance at December 31,
2017
|
13,844,584
|
$
8,307
|
$
25,642
|
$
(5,450
)
|
$
4,318
|
$
(810
)
|
$
32,007
|
|
Restricted stock units
issued
|
38,353
|
23
|
(23
)
|
—
|
—
|
—
|
—
|
|
Share-based compensation
expense
|
—
|
—
|
66
|
—
|
—
|
—
|
66
|
|
Restricted stock unit compensation
expense
|
—
|
—
|
111
|
—
|
—
|
—
|
111
|
|
Dividends
declared
|
—
|
—
|
—
|
(810
)
|
—
|
—
|
(810
)
|
|
Net income
|
—
|
—
|
—
|
1,153
|
—
|
—
|
1,153
|
|
Effect of adoption of ASU
2016-01
|
—
|
—
|
—
|
4,318
|
(4,318
)
|
—
|
—
|
|
Repurchase of common
stock
|
—
|
—
|
—
|
—
|
—
|
(1,153
)
|
(1,153
)
|
|
Balance at September 30,
2018
|
13,882,937
|
$
8,330
|
$
25,796
|
$
(789
)
|
$
—
|
$
(1,963
)
|
$
31,374
|
The
following table sets forth the computation of basic and diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net income
(numerator for basic and diluted earnings per share)
|
$
650
|
$
600
|
$
1,153
|
$
650
|
|
Denominator:
|
|
|
|
|
|
Denominator for
basic earnings per share weighted average shares
|
13,479,759
|
13,665,976
|
13,538,116
|
13,602,207
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
Options and
restricted stock units
|
21,828
|
22,321
|
25,874
|
102,677
|
|
Denominator:
|
|
|
|
|
|
Denominator for
diluted earnings per share weighted average shares
|
13,501,587
|
13,688,297
|
13,563,990
|
13,704,884
|
|
Basic income per
share
|
$
0.05
|
$
0.04
|
$
0.09
|
$
0.05
|
|
Diluted income per
share
|
$
0.05
|
$
0.04
|
$
0.09
|
$
0.05
|
Approximately
434,500 stock options for the three and nine months ended September
30, 2018, and 328,500 stock options for the three and nine months
ended September 30, 2017, were excluded from the calculation
because they were anti-dilutive.
9.
Non-Cash
Share-Based Employee Compensation
The
Company has an employee and non-employee director share-based
incentive compensation plan. Related to these programs, the Company
recorded non-cash share-based employee compensation expense of $28
and $66 for the three and nine months ended September 30, 2018,
respectively, compared with $19 and $34, respectively, for the same
periods last year. The Company considers its non-cash share-based
employee compensation expenses as a component of cost of products
and selling, general and administrative expenses. There was no
non-cash share-based employee compensation expense capitalized as
part of capital expenditures or inventory for the periods
presented.
The
Company uses the Black-Scholes-Merton option valuation model to
calculate the fair value of a stock option grant. The non-cash
share-based employee compensation expense recorded in the three and
nine months ended September 30, 2018 was calculated using certain
assumptions. Such assumptions are described more comprehensively in
Note 10 (Share-Based Employee Compensation) of the Company’s
consolidated financial statements included in its Annual Report on
Form 10-K for the fiscal year ended December 31, 2017.
A
summary of activity under the Company’s stock option plans
during the nine months ended September 30, 2018 is presented
below:
|
As of
January 1, 2018
|
|
Wgt.
Avg.
Exercise
Price
($)
Per
Share
|
Wgt.
Avg.
Remaining
Contractual
Life
(Years)
|
Wgt.
Avg.
Grant
Date
Fair Value
($)
Per
Share
|
Aggregate
Intrinsic
Value
($)
|
|
Outstanding
|
354,500
|
4.46
|
—
|
1.79
|
—
|
|
Vested
|
113,000
|
3.75
|
—
|
2.23
|
—
|
|
Nonvested
|
241,500
|
4.80
|
—
|
1.58
|
—
|
|
|
|
|
|
|
|
|
Period
activity
|
|
|
|
|
|
|
Issued
|
130,000
|
3.72
|
—
|
1.62
|
—
|
|
Exercised
|
—
|
—
|
—
|
—
|
—
|
|
Forfeited
|
24,000
|
5.10
|
—
|
1.37
|
—
|
|
Expired
|
—
|
—
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
As
of September 30, 2018
|
|
|
|
|
|
|
Outstanding
|
460,500
|
4.22
|
7.33
|
1.76
|
92,860
|
|
Vested
|
156,900
|
4.03
|
4.12
|
2.05
|
48,540
|
|
Nonvested
|
303,600
|
4.32
|
8.98
|
1.61
|
44,320
|
Restricted Stock Units
On
September 6, 2018, the Company granted to each non-employee
director restricted stock units with a grant fair value of $20 per
award (resulting in total aggregate grant-date fair value of $140),
which will vest in five equal annual installments beginning with
the first anniversary of the grant date, subject to the
director’s continued service through such date, provided
that, if the director makes himself available and consents to be
nominated by the Company for continued service as a director, but
is not nominated for the Board for election by shareholders, other
than for good reason as determined by the Board in its discretion,
then the restricted stock units shall vest in full as of the
director’s last date of service as a director of the
Company.
On June
4, 2018, the Company granted to each non-employee director
restricted stock units with a grant fair value of $20 per award
(resulting in total aggregate grant-date fair value of $140), which
will vest on June 4, 2019, subject to continued service through
such vesting date.
On June
15, 2017, the Company granted to each non-employee director
restricted stock units with a grant fair value of $20 per award
(resulting in total aggregate grant-date fair value of $140), which
vested on June 15, 2018.
The
Company recorded non-cash restricted stock unit compensation
expense of $38 and $111 for the three and nine months ended
September 30, 2018, respectively, compared with $35 and $41 for the
same periods last year.
10.
Commitments
and Contingencies
From
time to time the Company may be involved in various claims and
legal actions arising in the ordinary course of its business. On
March 28, 2017, The Sales Group, Inc. (“TSG”) filed a
lawsuit in the U.S. District Court for the Central District of
California against the Company. TSG was a sales representative of
the Company that the Company terminated in March 2017. TSG asserted
claims against the Company for alleged breach of oral contract,
violation of the California and Arizona sales representative
statutes and an accounting of alleged unpaid sales commissions.
TSG’s complaint sought damages in the amount of $6,090 for
alleged unpaid past and future sales commissions. On April 3, 2017,
counsel for TSG sent the Company a letter outlining additional
alleged grounds for recovery against the Company and offering to
settle the litigation in exchange for the continued payment of
sales commissions to TSG for a negotiated period, a buyout of
TSG’s alleged rights for a negotiated sum or reinstatement of
TSG for a period of at least 2.5 years with commission rates equal
to those in effect at the time of TSG’s termination. The
matter was mediated on November 14, 2017, during which the parties
agreed to a settlement. On December 19, 2017, the Company entered
into a settlement agreement with TSG, pursuant to which TSG agreed
to dismiss with prejudice its lawsuit filed against the Company.
Pursuant to the settlement agreement, the Company agreed to pay an
amount of $900 to TSG on or before December 31, 2017. The Company
also agreed to pay to TSG commissions, at the rates in effect since
February 7, 2013, on all orders for the Company’s products
received and accepted by the Company from the states of Arizona,
California, Nevada and Hawaii from January 1, 2018 through December
31, 2018, other than for (i) sales of the Company’s products
to federal government agencies and offices, (ii) sales of the
Company’s products to other end-users, excepting state and
local government agencies and offices, and (iii) sales of parts or
service, including warranty service. In addition, if at any time on
or before December 31, 2018, the Company completes a
change-in-control transaction, then the Company will pay to TSG an
amount equal to $2,000, less the amount of commissions paid by the
Company with respect to 2018, as described above. The settlement
agreement settled all claims raised by TSG in its lawsuit against
the Company. In December 2017, the Company recorded an estimated
commission amount of approximately $536. For the nine months ended
September 30, 2018, the Company paid $682 in commissions to TSG. In
June 2018, the Company estimated and recorded an additional
commission amount of approximately $290 for the remainder of 2018.
No additional commission amounts were estimated for the three
months ended September 30, 2018.
Purchase Commitments
As of
September 30, 2018, the Company had purchase orders to suppliers
for inventory of approximately $6,924.
Significant Customers
Sales
to United States government agencies represented approximately
$7,110 (53.5%) and $15,879 (41.0%) of the Company’s total
sales for the three and nine months ended September 30, 2018,
respectively, compared with approximately $5,210 (43.7%) and
$11,145 (36.5%), respectively, for the same periods last year.
Accounts receivable from agencies of the United States government
were $3,440 as of September 30, 2018, compared with approximately
$2,977 at the same date last year.
The
Company has a secured revolving credit facility with Silicon Valley
Bank with maximum borrowing availability of $1,000 (subject to a
borrowing base) and a maturity date of December 26, 2018. As of
September 30, 2018, the Company was in compliance with all
covenants under the loan and security agreement, as amended,
governing this revolving credit facility. For a description of such
covenants and the other terms and conditions of the loan and
security agreement, as amended, reference is made to Note 5 (Debt)
of the Company’s consolidated financial statements included
in its Annual Report on Form 10-K for the fiscal year ended
December 31, 2017. As of September 30, 2018, there were no
borrowings outstanding under the revolving credit facility and
there was $1,000 of borrowing available under the revolving credit
facility.
Item 2
.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 (the “Exchange Act”),
including the statements about our plans, objectives, expectations
and prospects. 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, 2017 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 product line;
●
successful
introduction of new products and technologies;
●
competition in the
land mobile radio industry;
●
general economic
and business conditions, including federal, state and local
government budget deficits and spending limitations;
●
the availability,
terms and deployment of capital;
●
reliance on
contract manufacturers and suppliers;
●
heavy reliance on
sales to agencies of the United States government;
●
allocations by
government agencies among multiple approved suppliers under
existing agreements;
●
our ability to
utilize deferred tax assets;
●
retention of
executive officers and key personnel;
●
our ability to
manage our growth;
●
our ability to
identify potential candidates for, and consummate, acquisition or
investment transactions, and risks incumbent to being a
noncontrolling interest stockholder in a corporation;
●
impact of our
capital allocation strategy;
●
our business with
manufacturers located in other countries;
●
our inventory and
debt levels;
●
protection of our
intellectual property rights;
●
fluctuation in our
operating results;
●
acts of war or
terrorism, natural disasters and other catastrophic
events;
●
any infringement
claims;
●
data security
breaches, cyber attacks and other factors impacting our technology
systems;
●
availability of
adequate insurance coverage;
●
maintenance of our
NYSE American 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.
Reported dollar
amounts in the management’s discussion and analysis
(“MD&A”) are disclosed in millions or as whole
dollar amounts.
The
following discussion and analysis should be read in conjunction
with our condensed consolidated financial statements and notes
thereto appearing elsewhere in this report and the MD&A,
consolidated financial statements and notes thereto appearing in
our Annual Report on Form 10-K for the fiscal year ended December
31, 2017.
Executive Overview
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-Safety Communications Officials
(“APCO Project 25,” or “P-25”). Later in
2018, we plan to introduce the first model in our line of
multi-band products to complement our existing KNG
products.
Effective on June
4, 2018, we changed our corporate name from “RELM Wireless
Corporation” to “BK Technologies, Inc.,” and our
common stock began trading on the NYSE American stock exchange
under the new ticker symbol “BKTI” on June 5, 2018. Our
stockholders approved the name change at the annual meeting of
stockholders held on June 4, 2018.
We
conduct business under the name BK Technologies, Inc. and 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 Summary
Our
financial and operating results for the three and nine months ended
September 30, 2018 were improved from the comparable periods last
year. Sales grew for both the third quarter and the nine month
periods of 2018 compared with the same periods last year. Gross
profit margins increased during the third quarter and nine month
periods of 2018 versus the same periods last year. Consequently,
operating income for the three and nine months ended September 30,
2018 increased significantly from the comparable periods last year.
For the nine month period, we also generated positive cash flow and
reduced inventory.
For the
third quarter of 2018, our sales increased 12.4% to approximately
$13.3 million, compared with approximately $11.8 million for the
same quarter last year. For the nine months ended September 30,
2018, sales increased 29.1% to approximately $38.7 million,
compared with $30.0 million for the same period last
year.
Gross
profit margins as a percentage of sales for the third quarter of
2018 grew to approximately 41.1%, compared with 32.3% for the third
quarter last year. For the nine month period ended September 30,
2018, gross profit margins as a percentage of sales increased to
41.8%, compared with 35.2% for the same period last
year.
For the
third quarter of 2018, selling, general and administrative expenses
(“SG&A”) totaled approximately $4.6 million (34.5%
of sales), compared with approximately $3.7 million (30.9% of
sales) for the same quarter last year. SG&A expenses for the
first nine months of 2018 totaled approximately $13.2 million
(34.2% of sales), compared with approximately $10.6 million (35.4%
of sales) for the same period last year.
Operating income
for the third quarter ended September 30, 2018, increased by
approximately $721,000 (459.2%) to approximately $878,000, compared
with approximately $157,000 for the same quarter last year. For the
nine month period of 2018, operating income increased by
approximately $3.0 million to approximately $3.0 million, compared
with an operating loss of approximately $76,000 for the same period
last year.
For the
three and nine months ended September 30, 2018, we recognized an
unrealized loss, totaling approximately $191,000 and $543,000,
respectively, on our investment in 1347 Property Insurance
Holdings, Inc., made through FGI 1347 Holdings, LP, a consolidated
variable interest entity. No comparable loss was incurred for last
year’s three and nine month periods. Also, for the nine
months ended September 30, 2018, we recognized a loss on the sale
of securities totaling approximately $849,000, compared with a $1.3
million gain for the same period last year. For the three months
ended September 30, 2018, we recognized other expenses totaling
approximately $48,000, compared with other income of approximately
$1,000 for the same period last year. For the nine months ended
September 30, 2018, other expense totaled approximately $274,000,
compared with approximately $146,000 for the same period last
year.
Pretax
income for the three months ended September 30, 2018, totaled
approximately $667,000, compared with approximately $852,000 for
the same quarter last year. For the nine months ended September 30,
2018, pretax income totaled approximately $1.4 million, compared
with approximately $1.0 million for the same period last
year.
For the
three and nine months ended September 30, 2018, we recognized
income tax expense totaling approximately $17,000 and $200,000,
respectively, compared with $252,000 and $353,000, 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, 2018 was
approximately $650,000 ($0.05 per basic and diluted share),
compared with approximately $600,000 ($0.04 per basic and diluted
share) for the same quarter last year. For the nine months ended
September 30, 2018, net income totaled approximately $1.2 million
($0.09 per basic and diluted share), compared with approximately
$650,000 ($0.05 per basic and diluted share) for the same period
last year.
As of
September 30, 2018, working capital totaled approximately $23.6
million, of which approximately $18.8 million was comprised of
cash, cash equivalents and trade receivables. As of December 31,
2017, working capital totaled approximately $26.7 million, of which
approximately $12.7 million was comprised of cash, 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
Sales
Three Months
Ended
|
Percentage of
Sales
Nine Months
Ended
|
|
|
|
|
|
|
|
Sales
|
100.0
%
|
100.0
%
|
100.0
%
|
100.0
%
|
|
Cost of
products
|
(58.9
)
|
(67.7
)
|
(58.2
)
|
(64.8
)
|
|
Gross
margin
|
41.1
|
32.3
|
41.8
|
35.2
|
|
Selling, general
and administrative expenses
|
(34.5
)
|
(30.9
)
|
(34.2
)
|
(35.4
)
|
|
Other income
(expense)
|
(1.6
)
|
5.8
|
(4.1
)
|
3.6
|
|
Income before
income taxes
|
5.0
|
7.2
|
3.5
|
3.4
|
|
Income tax
expense
|
(0.1
)
|
(2.1
)
|
(0.5
)
|
(1.2
)
|
|
Net
income
|
4.9
%
|
5.1
%
|
3.0
%
|
2.2
%
|
Net Sales
For the
third quarter ended September 30, 2018, net sales increased 12.4%
to approximately $13.3 million, compared with approximately $11.8
million for the same quarter last year. Net sales totaled
approximately $38.7 million for the nine months ended September 30,
2018, which was 29.1% greater than the comparable period last year,
and 98.2% of net sales for the full year of 2017.
The
increase in total sales for the third quarter was attributed
primarily to demand from both new and longstanding federal
customers, particularly wildland fire suppression agencies,
supplemented by certain state and Canadian public safety agencies.
For the nine months ended September 30, 2018, the increase in net
sales was attributed primarily to state public safety agencies,
including the State of California, federal customers, and
international customers, primarily in Canada.
Our
funnel of sales prospects for the remainder of 2018 and into next
year appear promising as we introduce our new multi-band products
and look to grow our market share, particularly in the state and
local arena. Accordingly, we are expanding and upgrading our sales
and marketing capabilities to capitalize on new opportunities and
drive sales growth.
Cost of Products and Gross Profit Margin
Gross
profit margin as a percentage of sales for the third quarter ended
September 30, 2018 increased to 41.1%, compared with 32.3% for the
same quarter last year. For the nine months ended September 30,
2018, gross profit margins increased to 41.8%, compared with 35.2%
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. The improvement in gross profit margins for
both the third quarter and nine-month period was attributed
primarily to increased sales combined with a more favorable mix of
product sales. Increased production volumes enabled us to more
effectively utilize and absorb our base of manufacturing overhead
expenses, and we are realizing benefits associated with
manufacturing and quality improvement programs. Comparatively, the
first three quarters last year included certain product enhancement
expenses and the discontinuation of a product development
initiative.
We
continue to utilize contract manufacturing relationships for
production efficiencies and to manage material and labor costs. We
anticipate that our current contract manufacturing relationships or
comparable alternatives will be available to us in the future. We
may encounter product cost and competitive pricing pressures in the
future. However, 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, 2018 totaled
approximately $4.6 million, or 34.5% of sales, compared with
approximately $3.7 million, or 30.9% of sales, for the third
quarter last year. For the nine months ended September 30, 2018,
SG&A expenses totaled approximately $13.2 million, or 34.2% of
sales, compared with approximately $10.6 million, or 35.4% of
sales, for the same period last year.
Engineering and
product development expenses for the third quarter of 2018 totaled
approximately $2.1 million (15.9% of total sales), compared with
approximately $1.2 million (10.3% of total sales) for the same
quarter last year. For the nine-month period, engineering and
product development expenses totaled approximately $5.8 million
(15.0% of sales), compared with approximately $3.4 million (11.2%
of sales) for the same period last year. The increase in
engineering expenses was driven by costs related to new product
development initiatives.
Marketing and
selling expenses for the third quarter of 2018 totaled
approximately $1.4 million (10.2% of sales) compared with
approximately $1.4 million (12.0% of sales) for the third quarter
last year. For the nine-month period, marketing and selling
expenses totaled approximately $4.2 million (10.9% of sales),
compared with approximately $4.0 million (13.4% of sales) for the
same period last year. The increase for the nine month period is
attributed primarily to sales commissions and incentive
compensation directly related to sales performance.
General
and administrative expenses for the third quarter of 2018 totaled
approximately $1.1 million (8.3% of total sales), compared with
approximately $1.0 million (8.6% of total sales) for the same
quarter last year. For the nine-month period, general and
administrative expenses totaled approximately $3.2 million (8.2% of
sales), compared with approximately $3.3 million (10.9% of sales)
for the same period last year. The slight increase for the third
quarter was attributed primarily to headquarters expenses, while
the decrease in costs for the nine-month period was primarily
related to one-time costs incurred last year related to changes in
senior leadership. Those cost decreases were partially offset by
expenses associated with changing the Company’s
name.
Operating Income (Loss)
Operating income
for the third quarter ended September 30, 2018 increased by
approximately $721,000 (459.2%) to approximately $878,000 (6.6% of
sales), compared with approximately $157,000 (1.3% of sales) for
the same quarter last year. For the nine months ended September 30,
2018, operating income increased to approximately $3.0 million
(7.6% of sales), compared with an operating loss of approximately
$76,000 (0.3% of sales) for the same period last year. The increase
in operating income for the quarter and nine-month periods was
attributed primarily to sales growth and improved gross profit
margins, which were partially offset by increased product
development expenses.
Other Income (Expense)
We
recorded net interest income of approximately $28,000 for the third
quarter ended September 30, 2018, compared with $14,000 for the
third quarter last year. For the nine months ended September 30,
2018, interest income totaled approximately $63,000, compared with
approximately $32,000 for the same period last year. Interest
income increased primarily as a result of our higher cash balance.
Interest expense may be incurred from time to time on outstanding
borrowings under our revolving credit facility and earn interest
income on our cash balances. The interest rate on such revolving
credit facility as of September 30, 2018 was the
Wall Street Journal
prime rate plus 25
basis points (5.50% as of September 30, 2018).
For the
three and nine months ended September 30, 2018, we recognized an
unrealized loss of approximately $191,000 and $543,000,
respectively, on our investment in 1347
Property Insurance Holdings, Inc. (Nasdaq: PIH).
I
n March and May 2018, we indirectly purchased
477,282 shares of common stock of PIH, for
approximately $3.7 million, through an investment in FGI 1347
Holdings, LP, a consolidated variable interest entity of which we
are the sole limited partner. For the three and nine months ended
September 30, 2017, we recognized gains of approximately $670,000
and $1.3 million, respectively, on the sales of available-for-sales
securities.
During
the first quarter of 2018, we sold 1,317,503 shares of Iteris,
Inc., which cost approximately $2.4 million, for approximately $8.3
million, and recognized a loss of approximately
$849,000.
For the
three months ended September 30, 2018, we recognized other expenses
totaling approximately $48,000, compared with other income of
approximately $1,000 for the same period last year. For the nine
months ended September 30, 2018, we recognized other expenses
totaling approximately $274,000, compared with approximately
$146,000 in expenses for the same period last year. These expenses
were primarily attributed to exchange losses related to sales under
a Canadian dollar-denominated contract. Also during last
year’s first quarter, we recorded a non-recurring loss of
approximately $104,000 on the disposal of assets related to a
discontinued product initiative.
Income Taxes
We
recorded income tax expense of approximately $17,000 and $200,000,
respectively, for the three and nine months ended September 30,
2018, compared with approximately $252,000 and $353,000,
respectively, for the same periods last year.
Our
income tax provision is based on management’s estimate of the
effective tax rate for the full year. The tax provision in
any period will be affected by, among other things, permanent, as
well as temporary differences in the deductibility of certain
items, in addition to changes in tax legislation. As a result, we
may experience significant fluctuations in the effective book tax
rate (that is, tax expense divided by pre-tax book income) from
period to period. For 2018, we generally expect our effective
tax rate to decline compared to 2017, primarily due to the
implementation of the Tax Cuts and Jobs Act enacted in December
2017, which, among other things, reduced the U.S. federal corporate
tax rate from 35% to 21%.
As of
September 30, 2018, our net deferred tax assets totaled
approximately $3.1 million, and were primarily composed of
NOLs. These NOLs totaled approximately $5.2 million for
federal and $12.7 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. We analyze 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.
Based
on our analysis of all available evidence, both positive and
negative, we have concluded that we do not have the ability to
generate sufficient taxable income in the necessary period to
utilize the entire benefit for the deferred tax asset. Management
estimates that as of September 30, 2018, it is more likely than not
that approximately $83,000 of the deferred tax asset will not be
realized due to the inability to generate sufficient Florida
taxable income in the necessary period to fully utilize the Florida
NOLs. 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, 2018.
Liquidity and Capital Resources
For the
nine months ended September 30, 2018, net cash provided by
operating activities totaled approximately $2.6 million, compared
with cash used in operating activities of approximately $245,000
for the same period last year. Cash provided by operating
activities was primarily related to net income, adjusted by
unrealized loss on investment in securities, and a decrease in
inventories, which were partially offset by a decrease in accounts
payable and an increase in trade accounts receivable.
For the
nine months ended September 30, 2018, we had net income of
approximately $1.2 million, compared with approximately $650,000
for the same period last year. Net inventories decreased during the
nine months ended September 30, 2018 by approximately $3.7 million,
compared with an increase of $1.3 million for the same period last
year. The 2018 decrease was primarily attributed to an increase in
sales. The loss on investment in securities for the nine months
ended September 30, 2018 totaled approximately $1.4 million,
compared with a gain of approximately $1.3 million for the same
period last year. For additional information pertaining to our
investment in securities, refer to Notes 1 and 6 to the condensed
consolidated financial statements included in this report. Accounts
receivable increased approximately $1.9 million during the nine
months ended September 30, 2018, compared with $3.6 million for the
same period last year, reflecting sales that were consummated later
in the respective quarter that had not yet completed their
collection cycle. Accounts payable for the nine months ended
September 30, 2018, decreased approximately $2.5 million, compared
with an increase of approximately $3.8 million for the same period
last year, primarily due to timing of payments to material
suppliers. Depreciation and amortization totaled approximately
$702,000 for the nine months ended September 30, 2018, compared
with approximately $727,000 for the same period last
year.
Cash
provided by investing activities for the nine months ended
September 30, 2018 totaled approximately $3.5 million, compared
with approximately $1.2 million for the same period last year.
Proceeds from the sale of available-for-sale securities totaled
approximately $8.3 million for the nine months ended September 30,
2018, compared with approximately $1.8 million for the same period
last year. We utilized approximately $3.7 million for an investment
in FGI 1347 Holdings, LP. There was no comparable investment for
the same period last year. For the nine months ended September 30,
2018, purchases of property, plant and equipment totaled
approximately $1.1 million, compared with approximately $572,000
for the same period last year.
For the
nine months ended September 30, 2018, approximately $2.0 million
was used in financing activities, primarily related to our capital
return program, which included quarterly dividends totaling
approximately $815,000 and stock repurchases totaling approximately
$1.2 million. For the same period last year, approximately $2.8
million was used to pay dividends and approximately $405,000 was
used for stock repurchases. For the same period last year, we also
received approximately $183,000 from the issuance of common stock
upon the exercise of stock options.
We have
a secured revolving credit facility with Silicon Valley Bank with
maximum borrowing availability of $1.0 million and a maturity date
of December 26, 2018. As of September 30, 2018, and the date of
this report, we were in compliance with all covenants under the
loan and security agreement, as amended, governing the revolving
credit facility. For a description of such covenants and the other
terms and conditions of the loan and security agreement, as
amended, reference is made to Note 5 (Debt) of our consolidated
financial statements included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2017.
As of
September 30, 2018, and the date of this report, there were no
borrowings outstanding under the revolving credit facility. As of
September 30, 2018, and the date of this report, there was $1.0
million of borrowing available under the revolving credit
facility.
Our
cash and cash equivalents balance at September 30, 2018 was
approximately $11.3 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, 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, 2017.
Critical Accounting Policies
In
response to the Securities and Exchange Commission’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. The Company adopted ASU No. 2014-09, "Revenue from
Contracts with Customers", and all the related amendments
(collectively “Topic 606”) in the first quarter of 2018
and applied the modified retrospective approach. Under Topic
606, revenue is recognized when control of promised goods and
services is transferred to customers, and the amount of revenue
recognized reflects the consideration to which an entity expects to
be entitled in exchange for the goods and services transferred.
The adoption of Topic 606 did not have, and is not expected
to have, a material effect on the timing or amount of revenue
recognized as compared with the Company’s previous revenue
recognition practices because the Company’s primary source of
revenues is from shipments of products.
There
were no other changes to our critical accounting policies during
the quarter ended September 30, 2018, as described in Item 7 of our
Annual Report on Form 10-K for the fiscal year ended December 31,
2017.
Item 4.
CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our
President (who serves as our principal 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 Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of September 30, 2018. Based on
this evaluation, they have concluded that our disclosure controls
and procedures were effective as of September 30,
2018.
Changes in Internal Control over Financial Reporting
During
the three months ended September 30, 2018, there were no changes in
our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of
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.