UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended January 31, 20182023
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:0-13301000-13301
RF INDUSTRIES, LTD.
(Exact name of registrant as specified in its charter)
Nevada | 88-0168936 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
16868 Via Del Campo Court, Suite 200 | 92127 |
(Address of principal executive offices) | (Zip Code) |
(858)
(858)549-6340
(Registrant’s telephone number, including area code)
7610 Miramar Road, Bldg. 6000, San Diego, CA 92126-4202
(Former address)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | RFIL | NASDAQ Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx ☒ Noo ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yesx ☒ Noo ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o☐ No x☒
The number of shares of the issuer’s Common Stock, par value $0.01 per share, outstanding as of March 8, 201810, 2023 was 8,974,297.10,291,067.
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
January 31, | October 31, | |||||||
2018 | 2017 | |||||||
(Unaudited) | (Note 1) | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 5,880 | $ | 6,039 | ||||
Trade accounts receivable, net of allowance for doubtful accounts of $71 and $73, respectively | 5,397 | 3,901 | ||||||
Inventories | 6,797 | 6,109 | ||||||
Other current assets | 755 | 744 | ||||||
TOTAL CURRENT ASSETS | 18,829 | 16,793 | ||||||
Property and equipment: | ||||||||
Equipment and tooling | 3,324 | 3,302 | ||||||
Furniture and office equipment | 837 | 871 | ||||||
4,161 | 4,173 | |||||||
Less accumulated depreciation | 3,535 | 3,462 | ||||||
Total property and equipment | 626 | 711 | ||||||
Goodwill | 3,219 | 3,219 | ||||||
Amortizable intangible assets, net | 2,891 | 3,030 | ||||||
Non-amortizable intangible assets | 1,237 | 1,237 | ||||||
Other assets | 49 | 70 | ||||||
TOTAL ASSETS | $ | 26,851 | $ | 25,060 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
January 31, | October 31, | |||||||
2023 | 2022 | |||||||
(Unaudited) | (Note 1) | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 3,770 | $ | 4,532 | ||||
Trade accounts receivable, net of allowance for doubtful accounts of $271 and $126, respectively | 13,905 | 14,812 | ||||||
Inventories | 20,937 | 21,054 | ||||||
Other current assets | 3,184 | 5,849 | ||||||
TOTAL CURRENT ASSETS | 41,796 | 46,247 | ||||||
Property and equipment: | ||||||||
Equipment and tooling | 4,622 | 4,497 | ||||||
Furniture and office equipment | 4,452 | 3,447 | ||||||
9,074 | 7,944 | |||||||
Less accumulated depreciation | 4,881 | 4,771 | ||||||
Total property and equipment, net | 4,193 | 3,173 | ||||||
Operating lease right of use assets, net | 12,708 | 13,480 | ||||||
Goodwill | 8,085 | 8,085 | ||||||
Amortizable intangible assets, net | 14,865 | 15,296 | ||||||
Non-amortizable intangible assets | 1,174 | 1,174 | ||||||
Deferred tax assets | 1,952 | 1,816 | ||||||
Other assets | 295 | 295 | ||||||
TOTAL ASSETS | $ | 85,140 | $ | 89,566 |
2 |
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
January 31, | October 31, | January 31, | October 31, | |||||||||||||
2018 | 2017 | 2023 | 2022 | |||||||||||||
(Unaudited) | (Note 1) | (Unaudited) | (Note 1) | |||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Accounts payable | $ | 2,101 | $ | 1,356 | $ | 4,849 | $ | 5,652 | ||||||||
Accrued expenses | 2,697 | 2,242 | 5,568 | 8,814 | ||||||||||||
Income tax payable | 96 | - | ||||||||||||||
Deferred revenue | 1,133 | - | ||||||||||||||
Current portion of Term Loan | 2,424 | 2,424 | ||||||||||||||
Current portion of operating lease liabilities | 1,728 | 1,887 | ||||||||||||||
Income taxes payable | 1,042 | 759 | ||||||||||||||
TOTAL CURRENT LIABILITIES | 4,894 | 3,598 | 16,744 | 19,536 | ||||||||||||
Deferred tax liabilities | 104 | 119 | ||||||||||||||
Operating lease liabilities | 14,866 | 15,025 | ||||||||||||||
Term Loan, net of debt issuance cost | 12,532 | 13,136 | ||||||||||||||
TOTAL LIABILITIES | 4,998 | 3,717 | 44,142 | 47,697 | ||||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||||
Common stock - authorized 20,000,000 shares of $0.01 par value; 8,974,297 and 8,872,246 shares issued and outstanding at January 31, 2018 and October 31, 2017, respectively | 90 | 89 | ||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||||
Common stock - authorized 20,000,000 shares of $0.01 par value; 10,291,067 and 10,193,287 shares issued and outstanding at January 31, 2023 and October 31, 2022, respectively | 103 | 102 | ||||||||||||||
Additional paid-in capital | 19,885 | 19,654 | 25,408 | 25,118 | ||||||||||||
Retained earnings | 1,878 | 1,600 | 15,487 | 16,649 | ||||||||||||
TOTAL STOCKHOLDERS' EQUITY | 21,853 | 21,343 | 40,998 | 41,869 | ||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 26,851 | $ | 25,060 | $ | 85,140 | $ | 89,566 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
3 |
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share amounts)
Three Months Ended January 31, | ||||||||
2018 | 2017 | |||||||
Net sales | $ | 10,341 | $ | 6,617 | ||||
Cost of sales | 7,268 | 4,760 | ||||||
Gross profit | 3,073 | 1,857 | ||||||
Operating expenses: | ||||||||
Engineering | 326 | 224 | ||||||
Selling and general | 2,193 | 1,992 | ||||||
Total operating expense | 2,519 | 2,216 | ||||||
Operating income (loss) | 554 | (359 | ) | |||||
Other income | 3 | 20 | ||||||
Income (loss) from continuing operations before provision (benefit) for income taxes | 557 | (339 | ) | |||||
Provision (benefit) for income taxes | 103 | (101 | ) | |||||
Income (loss) from continuing operations | 454 | (238 | ) | |||||
Income from discontinued operations, net of tax | - | 44 | ||||||
Consolidated net income (loss) | $ | 454 | $ | (194 | ) | |||
Earnings (loss) per share | ||||||||
Basic | ||||||||
Continuing operations | $ | 0.05 | $ | (0.03 | ) | |||
Discontinued operations | - | 0.01 | ||||||
Net income (loss) per share | $ | 0.05 | $ | (0.02 | ) | |||
Earnings (loss) per share | ||||||||
Diluted | ||||||||
Continuing operations | $ | 0.05 | $ | (0.03 | ) | |||
Discontinued operations | - | 0.01 | ||||||
Net income (loss) per share | $ | 0.05 | $ | (0.02 | ) | |||
Weighted average shares outstanding | ||||||||
Basic | 8,880,384 | 8,834,747 | ||||||
Diluted | 9,099,301 | 8,834,747 |
Three Months Ended January 31, | ||||||||
2023 | 2022 | |||||||
Net sales | $ | 18,343 | $ | 16,918 | ||||
Cost of sales | 13,257 | 12,834 | ||||||
Gross profit | 5,086 | 4,084 | ||||||
Operating expenses: | ||||||||
Engineering | 961 | 454 | ||||||
Selling and general | 5,294 | 3,992 | ||||||
Total operating expenses | 6,255 | 4,446 | ||||||
Operating loss | (1,169 | ) | (362 | ) | ||||
Other (expense) income | (153 | ) | 5 | |||||
Loss before provision for income taxes | (1,322 | ) | (357 | ) | ||||
Benefit from income taxes | (160 | ) | (80 | ) | ||||
Consolidated net loss | $ | (1,162 | ) | $ | (277 | ) | ||
Loss per share: | ||||||||
Basic | $ | (0.11 | ) | $ | (0.03 | ) | ||
Diluted | $ | (0.11 | ) | $ | (0.03 | ) | ||
Weighted average shares outstanding: | ||||||||
Basic | 10,222,540 | 10,067,186 | ||||||
Diluted | 10,222,540 | 10,067,186 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands, except share amounts)
For the Three Months Ended January 31, 2023 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
Balance, November 1, 2022 | 10,193,287 | $ | 102 | $ | 25,118 | $ | 16,649 | $ | 41,869 | |||||||||||
Exercise of stock options | 45,000 | - | 85 | - | 85 | |||||||||||||||
Stock-based compensation expense | - | - | 212 | - | 212 | |||||||||||||||
Issuance of restricted stock | 54,092 | 1 | - | - | 1 | |||||||||||||||
Tax withholding related to vesting of restricted stock | (1,312 | ) | - | (7 | ) | - | (7 | ) | ||||||||||||
Consolidated net loss | - | - | - | (1,162 | ) | (1,162 | ) | |||||||||||||
Balance, January 31, 2023 | 10,291,067 | $ | 103 | $ | 25,408 | $ | 15,487 | $ | 40,998 |
For the Three Months ended January 31, 2022 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-In | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
Balance, November 1, 2021 | 10,058,571 | $ | 101 | $ | 24,301 | $ | 15,201 | $ | 39,603 | |||||||||||
Stock-based compensation expense | - | - | 139 | - | 139 | |||||||||||||||
Issuance of restricted stock | 39,666 | - | - | - | - | |||||||||||||||
Tax withholding related to vesting of restricted stock | (2,062 | ) | - | (13 | ) | - | (13 | ) | ||||||||||||
Consolidated net loss | - | - | - | (277 | ) | (277 | ) | |||||||||||||
Balance, January 31, 2022 | 10,096,175 | $ | 101 | $ | 24,427 | $ | 14,924 | $ | 39,452 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended January 31, | ||||||||
2018 | 2017 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | 454 | $ | (194 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Bad debt expense | (2 | ) | 2 | |||||
Depreciation and amortization | 212 | 220 | ||||||
Stock-based compensation expense | 75 | 51 | ||||||
Deferred income taxes | (15 | ) | 24 | |||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable | (1,494 | ) | 383 | |||||
Inventories | (688 | ) | (532 | ) | ||||
Other current assets | (11 | ) | (107 | ) | ||||
Other long-term assets | 21 | 20 | ||||||
Accounts payable | 745 | 235 | ||||||
Income tax payable | 96 | - | ||||||
Accrued expenses | 455 | (761 | ) | |||||
Other long-term liabilities | - | (40 | ) | |||||
Net cash used in operating activities | (152 | ) | (699 | ) | ||||
INVESTING ACTIVITIES: | ||||||||
Proceeds from landlord for tenant improvements | 34 | - | ||||||
Capital expenditures | (22 | ) | (6 | ) | ||||
Net cash provided by (used in) investing activities | 12 | (6 | ) | |||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from exercise of stock options | 157 | - | ||||||
Excess tax benefit from cancelled stock options | - | (23 | ) | |||||
Dividends paid | (176 | ) | (176 | ) | ||||
Net cash used in financing activities | (19 | ) | (199 | ) | ||||
Net decrease in cash and cash equivalents | (159 | ) | (904 | ) | ||||
Cash and cash equivalents, beginning of period | 6,039 | 5,258 | ||||||
Cash and cash equivalents, end of period | $ | 5,880 | $ | 4,354 | ||||
Supplemental cash flow information – income taxes paid | $ | 3 | $ | 13 |
Three Months Ended January 31, | ||||||||
2023 | 2022 | |||||||
OPERATING ACTIVITIES: | ||||||||
Consolidated net loss | $ | (1,162 | ) | $ | (277 | ) | ||
Adjustments to reconcile consolidated net income to net cash provided by (used in) operating activities: | ||||||||
Bad debt expense | 64 | (4 | ) | |||||
Depreciation and amortization | 541 | 180 | ||||||
Stock-based compensation expense | 212 | 139 | ||||||
Amortization of debt issuance cost | 2 | - | ||||||
Tax payments related to shares cancelled for vested restricted stock awards | (7 | ) | (13 | ) | ||||
Deferred income taxes | (136 | ) | 23 | |||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable | 843 | 3,013 | ||||||
Inventories | 117 | (2,299 | ) | |||||
Other current assets | 2,665 | (693 | ) | |||||
Right of use assets | 383 | (15 | ) | |||||
Accounts payable | (803 | ) | (122 | ) | ||||
Accrued expenses | (3,246 | ) | 625 | |||||
Deferred revenue | 1,133 | - | ||||||
Income taxes payable | 283 | - | ||||||
Net cash provided by operating activities | 889 | 557 | ||||||
INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (1,130 | ) | (103 | ) | ||||
Net cash used in investing activities | (1,130 | ) | (103 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from exercise of stock options | 85 | - | ||||||
Term Loan payments | (606 | ) | - | |||||
Net cash used in financing activities | (521 | ) | - | |||||
Net (decrease) increase in cash and cash equivalents | (762 | ) | 454 | |||||
Cash and cash equivalents, beginning of period | 4,532 | 13,053 | ||||||
Cash and cash equivalents, end of period | $ | 3,770 | $ | 13,507 | ||||
Supplemental cash flow information – income taxes paid | $ | - | $ | 156 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
RF INDUSTRIES, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -– Unaudited interim condensed consolidated financial statements
TheOur accompanying unaudited condensed consolidated financial statements of RF Industries, Ltd. and its divisions and three wholly-owned subsidiaries (collectively, hereinafter the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of AmericaGAAP for complete financial statements. In the opinion of management, all adjustments, which are normal and recurring, have been included in order to make the information not misleading. Information included in the consolidated balance sheet as of October 31, 20172022 has been derived from, and certain terms used herein are defined in, the audited consolidated financial statements of the CompanyRF Industries, Ltd. as of October 31, 20172022 included in the Company’sour Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 20172022 that was previously filed with the Securities and Exchange Commission (“SEC”). Operating results for the three monthmonths ended January 31, 20182023 are not necessarily indicative of the results that may be expected for the year ending October 31, 2018.2023. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report onour Form 10-K for the year ended October 31, 2017.10-K.
Principles of consolidation
The accompanying unaudited condensed consolidated financial statements for the periods ended on or before January 31, 2022 include the accounts of RF Industries, Ltd., and our four wholly-owned subsidiaries: Cables Unlimited, Inc. (“Cables Unlimited”), Comnet Telecom Supply, Inc. (“Comnet”), and Rel-Tech Electronics, Inc. (“Rel-Tech”), wholly-owned subsidiariesC Enterprises, Inc. (“C Enterprises”), and Schroff Technologies International, Inc. (“Schrofftech”). The unaudited condensed consolidated financial statements for the three months ended January 31, 2023 include the accounts of RF Industries, Ltd. and our five wholly-owned subsidiaries: Cables Unlimited, Inc. (“Cables Unlimited”), Rel-Tech Electronics, Inc. (“Rel-Tech”), C Enterprises, Inc. (“C Enterprises”), Schroff Technologies International, Inc. (“Schrofftech”), and Microlab/FXR LLC (“Microlab”). Microlab is a wholly-owned subsidiary that RF Industries, Ltd. acquired on March 1, 2022. For periods on or before January 31, 2022, references herein to the “Company”, “we”, “ us”, or “ our” shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech and for all periods after January 31, 2022, reference to the “Company”, “ we”, “ us”, or “our” shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, Schrofftech and Microlab. All intercompany balances and transactions have been eliminated in consolidation.
Revenue recognitionFair value measurement
Four basic criteria mustWe measure at fair value certain financial assets and liabilities. Fair value is defined as the price that would be met before revenue can be recognized: (1) persuasive evidencereceived to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. GAAP specifies a hierarchy of an arrangement exists; (2) delivery has occurredvaluation techniques based on whether the inputs to those valuation techniques are observable or services rendered; (3)unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the fee is fixedfollowing fair-value hierarchy:
Level 1— Quoted prices for identical instruments in active markets;
Level 2— Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and determinable;model-derived valuations in which all significant inputs and (4) collectability is reasonably assured. The Company recognizes revenuesignificant value drivers are observable in active markets; and
Level 3— Valuations derived from product sales after purchase ordersvaluation techniques in which one or more significant inputs or significant value drivers are received that contain a fixed priceunobservable.
As of January 31, 2023 and October 31, 2022, the carrying amounts reflected in the accompanying consolidated balance sheets for shipments with terms of FOB Shipping Point, revenue is recognized upon shipment, for shipments with terms of FOB Destination, revenue is recognized upon deliverycash and revenue from services is recognized when services are performed,cash equivalents, accounts receivable, and the recovery of the consideration is considered probable.accounts payable approximated their carrying value due to their short-term nature.
Recent accounting standards
Recently issued accounting pronouncements not yet adopted:
In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases. This ASU 2016-13, Financial Instruments—Credit Losses, which requires lesseesa financial asset (or a group of financial assets) measured at amortized cost basis to recognize most leasesbe presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on their balance sheets related to the rights and obligations created by those leases. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases.financial asset. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic326), which pushes back the effective date for public business entities that are smaller reporting companies, as defined by the SEC, to fiscal years.years beginning after December 15, 2022. Early adoption is permitted. The Company isWe are currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This guidance will supersede Topic 605, Revenue Recognition, in addition to other industry-specific guidance, once effective. The new standard requires a company to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, as a revision to ASU 2014-09, which revised the effective date to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but not prior to periods beginning after December 15, 2016 (i.e., the original adoption date per ASU 2014-09). In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies certain aspects of the principal-versus-agent guidance, including how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The amendments also reframe the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue over time or at a point in time. The amendments also clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract. The Company continues to assess the impact this new standard may have on its ongoing financial reporting. The Company has identified its revenue streams both by contract and product type and is assessing each for potential impacts. For the revenue streams assessed, the Company does not anticipate a material impact in the timing or amount of revenue recognized.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other, which simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.” The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements.
Recently issued accounting pronouncements adopted:
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation. The new standard modified several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. One provision within this pronouncement requires that excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense in the statement of income, rather than within additional paid-in capital on the balance sheet. The Company adopted this provision in the first quarter of fiscal 2018. The adoption of this provision was applied prospectively. The impact to the Company's results of operations related to this provision in the first quarter of fiscal 2018 was an increase in the benefit for income taxes of $19,000, and a 3.5% lower effective tax rate than if the standard had not been adopted. The impact of this provision on the Company's future results of operations will depend in part on the market prices for the Company's shares on the dates there are taxable events related to share awards, but is not expected to be material. In connection with another provision within this pronouncement, the Company has elected to account for forfeitures as they occur rather than estimate expected forfeitures, with the change being applied prospectively. The adoption of this and other provisions within the pronouncement did not have a material impact on the Company’sour unaudited condensed consolidated financial statements.
Note 2 - Discontinued– Business acquisition
On March 1, 2022, the Company completed its purchase (the “Purchase Transaction”) of 100% of the issued and outstanding membership interests of Microlab, a New Jersey limited liability company, from Wireless Telecom Group, Inc, a New Jersey corporation (the “Seller”) pursuant to the Membership Interest Purchase Agreement (the “Purchase Agreement”) dated December 16, 2021, with the Seller. The consideration for the Purchase Transaction was $24,250,000, subject to certain post-closing adjustments as set forth in the Purchase Agreement. The purchase price was paid in cash at the closing. The Company funded $17 million of the cash purchase price from the funds obtained under the Term Loan (as defined in Note 11) and paid the remaining amount of the cash purchase price with cash on hand. During the three months ended July 31, 2022, we paid an additional $225,000 in purchase consideration as a result of certain post-closing adjustments relating to net working capital.
The acquisition was accounted for with the acquisition method of accounting. The acquired assets and assumed liabilities have been recorded at their estimated fair values. We determined the estimated fair values with the assistance of appraisals or valuations performed by an independent third-party specialist. Microlab designs and manufactures high-performance radio frequency and microwave products enabling signal distribution and deployment of in-building DAS (distributed antenna systems), wireless base stations and small cell networks. The Microlab acquisition further diversifies and strengthens the portfolio of products that we offer to the market and allows us to provide a more complete solution to our customers in key market segments. All manufacturing operations are performed at Microlab’s facilities in New Jersey.
The acquisition closed on March 1, 2022, accordingly, subsequent to March 1, 2022, Microlab’s financial results have been included in the results of the RF Connector and Cable Assembly (“RF Connector”) segment as well as in the consolidated statements of operations. The Company expects the goodwill recorded to be deductible for income tax purposes. Acquired amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives ranging from one to 15 years. Total costs, as of October 31, 2022, related to the acquisition of Microlab were approximately $1.3 million and have been expensed as incurred and categorized in selling and general expenses.
The following table summarizes the components of the purchase price at fair values at March 1, 2022:
Cash consideration paid at closing | $ | 24,250,000 | ||
Post-closing adjustment | 225,000 | |||
Total consideration transferred | $ | 24,475,000 |
The following table summarizes the allocation of the preliminary purchase price at fair value at March 1, 2022:
Current assets | $ | 6,620,000 | ||
Property and equipment | 198,000 | |||
Intangible assets | 13,840,000 | |||
Goodwill | 5,617,000 | |||
Non-interest bearing liabilities | (1,800,000 | ) | ||
Net assets acquired at fair value | $ | 24,475,000 |
The following unaudited pro forma financial information presents the combined operating results of the Company and Microlab as if both acquisitions had occurred as of the beginning of the earliest period presented. Pro forma data is subject to various assumptions and estimates and is presented for informational purposes only. This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future consolidated operating results.
Unaudited pro forma financial information assuming the acquisition of Microlab as of November 1, 2021 is presented in the following table:
Three Months Ended January 31, | ||||||||
2023 | 2022 | |||||||
Revenue | $ | 18,343 | $ | 21,969 | ||||
Net (loss) income | (1,162 | ) | 839 | |||||
Earnings per share | ||||||||
Basic | $ | (0.11 | ) | $ | 0.08 | |||
Diluted | $ | (0.11 | ) | $ | 0.08 | |||
Basic | 10,222,540 | 10,067,186 | ||||||
Diluted | 10,222,540 | 10,215,815 |
Note 3 – Concentrations of credit risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We maintain our cash and cash equivalents with high-credit quality financial institutions. At January 31, 2023, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $2.6 million.
Sales from each customer that were 10% or greater of net sales were as follows:
Three Months Ended January 31, | ||||||||
2023 | 2022 | |||||||
Wireless provider | 15 | % | 32 | % |
For the three months ended January 31, 20182023, one wireless carrier customer accounted for 15% of net sales and January 31, 2017, the Company recognized approximately $0 and $62,00016% of royalty income, respectively, for RadioMobile, which amount has been included within discontinued operations.
During March 2016, the Company announced the shutdown of its Bioconnect division, which comprised the entire operations of the Medical Cabling and Interconnect segment. The closure is part of the Company’s ongoing plan to close or dispose of underperforming divisions that are not part of the Company’s core operations.total net accounts receivable balance. For the three months ended January 31, 2017,2022, one wireless carrier customer accounted for 32% of net sales and 37% of total net accounts receivable balance. Although this customer has been a significant customer of the Company, recognized approximately $10,000the written agreements with this customer do not have any minimum purchase obligations and this customer could stop buying our products at any time and for any reason. A reduction, delay or cancellation of incomeorders from salethis customer or the loss of equipment for the Bioconnect division, which has been included within discontinued operations.this customer could significantly reduce our future revenues and profits.
Note 3 - Inventories and major vendors
Inventories, consisting of materials, labor and manufacturing overhead, are stated at the lower of cost or market. Cost has been determined using the weighted average cost method. Inventories consist of the following (in thousands):
January 31, 2018 | October 31, 2017 | |||||||
Raw materials and supplies | $ | 2,932 | $ | 2,520 | ||||
Work in process | 367 | 194 | ||||||
Finished goods | 3,498 | 3,395 | ||||||
Totals | $ | 6,797 | $ | 6,109 |
One vendor accounted for 23% of inventory purchases for the three months ended January 31, 2018. No vendor accounted for greater than 10% of inventory purchases for the three months ended January 31, 2017. The Company has arrangements with these vendors to purchase product based on purchase orders periodically issued by the Company.
Note 4 – Inventories and major vendors
Inventories, consisting of materials, labor and manufacturing overhead, are stated at the lower of cost or net realizable value. Cost has been determined using the weighted average cost method. Inventories consist of the following (in thousands):
January 31, 2023 | October 31, 2022 | |||||||
Raw materials and supplies | $ | 14,823 | $ | 15,238 | ||||
Work in process | 615 | 439 | ||||||
Finished goods | 5,499 | 5,377 | ||||||
Totals | $ | 20,937 | $ | 21,054 |
For the three months ended January 31, 2023, two vendors accounted for 12% and 10% of inventory purchases. For the three months ended January 31, 2022, two vendors accounted for 30% and 10% of inventory purchases. We have arrangements with these vendors to purchase products based on purchase orders that we periodically issue.
Note 4 -5 – Other current assets
Other current assets consist of the following (in thousands):
January 31, 2018 | October 31, 2017 | January 31, 2023 | October 31, 2022 | |||||||||||||
Prepaid taxes | $ | - | $ | 20 | ||||||||||||
Employee retention credit ("ERC") | $ | 396 | $ | 1,636 | ||||||||||||
Prepaid expense | 472 | 526 | 1,188 | 972 | ||||||||||||
Notes receivable, current portion | 83 | 83 | ||||||||||||||
Reimbursement for tenant improvements | 1,321 | 2,810 | ||||||||||||||
Other | 200 | 115 | 279 | 431 | ||||||||||||
Totals | $ | 755 | $ | 744 | ||||||||||||
$ | 3,184 | $ | 5,849 |
Long-termPursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act), eligible employers are able to claim an ERC, which is a refundable tax credit against certain employment taxes. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS. The period assessed for eligibility of the ERC is on a calendar year basis. As of January 31, 2023, the remaining portion of notes receivable of $0 and $21,000the ERC that we have not yet received is recordedincluded as other receivables in other assets at January 31, 2018 and October 31, 2017, respectively.current assets.
Note 5 -6 – Accrued expenses and other long-termcurrent liabilities
Accrued expenses consist of the following (in thousands):
January 31, 2018 | October 31, 2017 | January 31, 2023 | October 31, 2022 | |||||||||||||
Wages payable | $ | 935 | $ | 855 | $ | 2,400 | $ | 3,634 | ||||||||
Accrued receipts | 1,036 | 695 | 998 | 2,136 | ||||||||||||
Earn-out liability | 206 | 236 | ||||||||||||||
Other current liabilities | 520 | 456 | ||||||||||||||
Other accrued expenses | 1,712 | 1,847 | ||||||||||||||
Tenant improvements payable | 458 | 1,197 | ||||||||||||||
Totals | $ | 2,697 | $ | 2,242 | $ | 5,568 | $ | 8,814 |
Accrued receipts represent purchased inventory for which invoices have not been received.
The Company measures at fair value certain financial assets and liabilities. U. S. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following fair-value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets;
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The contingent consideration liability represents future earn-out liability that we may be required to pay in conjunction with the acquisition of Rel-Tech and Comnet. The Company estimates the fair value of the earn-out liability using a probability-weighted scenario of estimated qualifying earn-out gross profit related to Rel-Tech and EBITDA related to Comnet calculated at net present value (level 3 of the fair value hierarchy).
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2018 (in thousands):
Description | Level 1 | Level 2 | Level 3 | |||||||||
Earn-out liability | $ | - | $ | - | $ | 206 |
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2017 (in thousands):
Description | Level 1 | Level 2 | Level 3 | |||||||||
Earn-out liability | $ | - | $ | - | $ | 236 |
The following table summarizes the Level 3 transactions for the three months ended January 31, 2018 and for the year ended October 31, 2017 (in thousands):
Level 3 | ||||||||
January 31, 2018 | October 31, 2017 | |||||||
Beginning balance | $ | 236 | $ | 835 | ||||
Payments | - | (578 | ) | |||||
Change in value | (30 | ) | (21 | ) | ||||
Ending Balance | $ | 206 | $ | 236 |
Note 6 - Earnings7 – Loss per share
Basic earnings (loss)loss per share is computed by dividing net income (loss)loss by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding increased by the effects of assuming that other potentially dilutive securities (such as stock options) outstanding during the period had been exercised and the treasury stock method had been applied. During the three months ended January 31, 2023 and 2022, we reported a net loss, and in periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation due to their anti-dilutive effect. Potentially dilutiveissuable securities totaling 771,973that are out-of-the-money totaled 749,488 and 1,024,188459,889 shares for the three months ended January 31, 20182023 and 2017,2022, respectively, and were excluded from the calculation of diluted per share amounts because of their anti-dilutive effect.
The following table summarizes the computation of basic and diluted weighted average shares outstanding:
Three Months Ended January 31, | ||||||||
2018 | 2017 | |||||||
Weighted average shares outstanding for basic earnings (loss) per share | 8,880,384 | 8,834,747 | ||||||
Add effects of potentially dilutive securities-assumed exercise of stock options | 218,917 | - | ||||||
Weighted average shares outstanding for diluted earnings (loss) per share | 9,099,301 | 8,834,747 |
Three Months Ended January 31, | ||||||||
2023 | 2022 | |||||||
Weighted average shares outstanding for basic earnings per share | 10,222,540 | 10,067,186 | ||||||
Add effects of potentially dilutive securities-assumed exercise of stock options | - | - | ||||||
Weighted average shares outstanding for diluted earnings per share | 10,222,540 | 10,067,186 |
Note 7 - Stock-based compensation and equity transactions
The Company’s current stock incentive plan provides for the granting of qualified and nonqualified options to the Company’s officers, directors and employees. The Company satisfies the exercise of options by issuing previously unissued common shares. On December 13, 2017, the Company granted 80,000 incentive stock options to an employee. These options vest 8,000 on the date of grant and 8,000 shares per year thereafter on each of the next nine anniversaries of December 13, 2017 and expire ten years from date of grant. No options were granted to Company employees during the three months ended January 31, 2017.
The weighted average fair value of employee and non-employee directors’ stock options granted by the Company during the three months ended January 31, 2018 and 2017 was estimated to be $2.44 and $1.50, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:
2018 | 2017 | |||||||
Risk-free interest rate | 1.87 | % | 0.98 | % | ||||
Dividend yield | 3.28 | % | 5.33 | % | ||||
Expected life of the option | 4.54 years | 3.50 years | ||||||
Volatility factor | 46.83 | % | 42.37 | % |
Expected volatilities are based on historical volatility of the Company’s stock price and other factors. The Company used the historical method to calculate the expected life of the 2018 and 2017 option grants. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The dividend yield is based upon the historical dividend yield.
Company stock option plans
Descriptions of the Company’s stock option plans are included in Note 9 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2017. A summary of the status of the options granted under the Company’s stock option plans as of January 31, 2018 and the changes in options outstanding during the three months then ended is presented in the table that follows:
Weighted | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at November 1, 2017 | 1,159,771 | $ | 3.19 | |||||
Options granted | 269,635 | $ | 2.44 | |||||
Options canceled or expired | (163,769 | ) | $ | 4.86 | ||||
Options outstanding at January 31, 2018 | 1,265,637 | $ | 3.08 | |||||
Options exercisable at January 31, 2018 | 817,913 | $ | 3.10 | |||||
Options vested and expected to vest at January 31, 2018 | 1,261,614 | $ | 3.08 |
Weighted average remaining contractual life of options outstanding as of January 31, 2018: 4.63 years
Weighted average remaining contractual life of options exercisable as of January 31, 2018: 3.21 years
Weighted average remaining contractual life of options vested and expected to vest as of January 31, 2018: 4.62 years
Aggregate intrinsic value of options outstanding at January 31, 2018: $1,012,000
Aggregate intrinsic value of options exercisable at January 31, 2018: $736,000
Aggregate intrinsic value of options vested and expected to vest at January 31, 2018: $1,007,000
As of January 31, 2018, $418,000 of expense with respect to nonvested share-based arrangements has yet to be recognized but is expected to be recognized over a weighted average period of 5.04 years.
Non-employee directors receive $50,000 annually, which is paid one-half in cash and one-half through the grant of non-qualified stock options to purchase shares of the Company’s common stock. During the quarter ended January 31, 2018, the Company granted each of its five non-employee directors 37,927 options. The number of stock options granted to each director was determined by dividing $25,000 by the fair value of a stock option grant using the Black-Scholes model ($0.659 per share). These options vest ratably over fiscal year 2018.
Stock option expense
During the three months ended January 31, 2018 and 2017, stock-based compensation expense totaled $75,000 and $51,000, respectively. For the three months ended January 31, 2018 and 2017, stock-based compensation classified in cost of sales amounted to none and $3,000, respectively, and stock-based compensation classified in selling and general expense amounted to $75,000 and $48,000, respectively.
Note 8 - Concentrations of credit risk– Stock-based compensation and equity transactions
Financial instruments that potentially subjectOn January 10, 2022, we granted a total of 39,666 shares of restricted stock and 106,001 incentive stock options to one manager and three officers. The shares of restricted stock and incentive stock options vest over four years as follows: (i) one-quarter of the Company to concentrationsrestricted shares and options shall vest on January 10, 2023; and (ii) the remaining restricted shares and options shall vest in 12 equal quarterly installments over the next three years. All incentive stock options expire 10 years from the date of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. At January 31, 2018, the Company had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $5.3 million.grant.
One customer accounted for approximately 36%On January 10, 2023, we granted a total of 54,092 shares of restricted stock and 108,181 incentive stock options to one manager and three officers. The shares of restricted stock and incentive stock options vest over four years as follows: (i) one-quarter of the Company’s net sales forrestricted shares and options shall vest on January 10, 2024; and (ii) the three-month periodremaining restricted shares and options shall vest in 12 equal quarterly installments over the next three years. Also on January 10, 2023, we granted another manager 50,000 incentive stock options. These options vested in five equal installments on the anniversaries of January 10, 2023. All incentive stock options expire 10 years from the date of grant.
No other shares or options were granted to company employees during the three months ended January 31, 2018. At January 31, 2018, this customer’s accounts receivable balance accounted for approximately 32%2023 and 2022.
The weighted average fair value of employee stock options that were granted during the Company’s total net accounts receivable balance. Two customers accounted for approximately 15% and 10% of the Company’s net sales for the three-month periodthree months ended January 31, 2017. At2023 and 2022 was estimated to be $3.21 and $3.84, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:
Three Months Ended January 31, | ||||||||
2023 | 2022 | |||||||
Risk-free interest rate | 3.76 | % | 1.23 | % | ||||
Dividend yield | 0.00 | % | 0.00 | % | ||||
Expected life of the option (years) | 7.00 | 7.00 | ||||||
Volatility factor | 54.30 | % | 53.35 | % |
Expected volatilities are based on historical volatility of our stock price and other factors. We used the historical method to calculate the expected life of the 2023 and 2022 option grants. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The dividend yield is based upon the historical dividend yield.
Company stock option plans
Descriptions of our stock option plans are included in Note 9 of our Annual Report on Form 10-K for the year ended October 31, 2022. A summary of the status of the options granted under our stock option plans as of January 31, 2017, these customers’ accounts receivable balances accounted for approximately 15%2023 and 13%the changes in options outstanding during the three months then ended is presented in the table that follows:
Weighted | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at November 1, 2022 | 691,005 | $ | 5.87 | |||||
Options granted | 158,181 | $ | 5.46 | |||||
Options exercised | (45,000 | ) | $ | 1.90 | ||||
Options cancelled | - | $ | - | |||||
Options outstanding at January 31, 2023 | 804,186 | $ | 6.01 | |||||
Options exercisable at January 31, 2023 | 385,216 | $ | 6.69 | |||||
Options vested and expected to vest at January 31, 2023 | 798,697 | $ | 6.02 |
Weighted average remaining contractual life of options outstanding as of January 31, 2023: 7.18 years
Weighted average remaining contractual life of options exercisable as of January 31, 2023: 6.09 years
Weighted average remaining contractual life of options vested and expected to vest as of January 31, 2023: 7.18 years
Aggregate intrinsic value of options outstanding at January 31, 2023: $341,674
Aggregate intrinsic value of options exercisable at January 31, 2023: $124,696
Aggregate intrinsic value of options vested and expected to vest at January 31, 2023: $337,451
As of January 31, 2023, $1,096,683 and $777,069 of expenses with respect to nonvested stock options and restricted shares, respectively, has yet to be recognized but is expected to be recognized over a weighted average period of 2.83 and 1.32 years, respectively.
Stock option expense
During the Company’s total net accounts receivable balance. Although these customers have been on-going major customers of the Company, the written agreements with these customers do not have any minimum purchase obligationsthree months ended January 31, 2023 and they could stop buying the Company’s products at any time2022, stock-based compensation expense totaled $212,000 and for any reason. A reduction, delay or cancellation of orders from these customers or the loss of these customers could significantly reduce the Company’s future revenues$139,000, respectively, and profits.was classified in selling and general expense.
Note 9 -– Segment information
The Company aggregatesWe aggregate operating divisions into operatingtwo reporting segments that have similar economic characteristics primarily in the following areas: (1) the nature of the product and services; (2) the nature of the production process; (3) the type or class of customer for their products and services; (4) the methods used to distribute their products or services; and (5) if applicable, the nature of the regulatory environment. AsBased upon this evaluation, as of January 31, 2018, the Company2023, we had two segments: 1) reportable segments – RF Connector and Cable Assembly (“RF Connector”) segment and 2) Custom Cabling Manufacturing and Assembly based upon this evaluation.
(“Custom Cabling”) segment.
The RF Connector and Cable Assembly segment consistedconsists of one divisiontwo divisions and the Custom Cabling Manufacturing and Assembly segment was composedconsists of threefour divisions. The foursix divisions that met the quantitative thresholds for segment reporting are the RF Connector and Cable Assembly division (“RF Connector division”), Cables Unlimited, ComnetRel-Tech, C Enterprises, Schrofftech, and Rel-Tech. The specific customers are different forMicrolab. While each division; however,segment has similar products and services, there is somewas little overlapping of these services to their customer base. The biggest difference in segments is in the channels of sales: sales or product and services for the RF Connector segment were primarily through the distribution channel, while the Custom Cabling segment sales were through a combination of distribution and direct to them. The methods used to distribute products are similar within each division aggregated.the end user.
Management identifies the Company’s segments based on strategic business units that are, in turn, based along market lines. These strategic business units offer products and services to different markets in accordance with their customer base and product usage. For segment reporting purposes, the RF Connector and Cable Assembly divisionMicrolab divisions constitutes the RF Connector and Cable Assembly segment, and the Cables Unlimited, ComnetRel-Tech, C Enterprises, and Rel-TechSchrofftech divisions constitute the Custom Cabling Manufacturing and Assembly segment.
As reviewed by the Company’s chief operating decision maker, the Company evaluatesWe evaluate the performance of each segment based on income or loss before income taxes. The Company chargesWe charge depreciation and amortization directly to each division within the segment. Accounts receivable, inventory, property and equipment, right of use assets, goodwill and intangible assets are the only assets identified by segment. Except as discussed above, the accounting policies for segment reporting are the same for the Company as a whole.
Substantially allAll of the Company’sour operations are conducted in the United States; however, the Company deriveswe derive a portion of itsour revenue from export sales. The Company attributesWe attribute sales to geographic areas based on the location of the customers. The following table presents the sales of the Company by geographic area for the three monthsyears ended January 31, 20182023 and 20172022 (in thousands):
Three Months Ended January 31, | ||||||||||||||||
2018 | 2017 | 2023 | 2022 | |||||||||||||
United States | $ | 10,138 | $ | 6,536 | $ | 16,104 | $ | 16,418 | ||||||||
Foreign Countries: | ||||||||||||||||
Canada | 153 | 46 | 584 | 297 | ||||||||||||
Italy | 1,098 | - | ||||||||||||||
Mexico | 39 | 7 | 1 | 25 | ||||||||||||
All Other | 11 | 28 | 556 | 178 | ||||||||||||
203 | 81 | 2,239 | 500 | |||||||||||||
Totals | $ | 10,341 | $ | 6,617 | $ | 18,343 | $ | 16,918 |
Net sales, income (loss) from continuing operations before provision (benefit)benefit for income taxes and other related segment information for the three months ended January 31, 20182023 and 20172022 are as follows (in thousands):
RF Connector | Custom Cabling | RF Connector | Custom Cabling | |||||||||||||||||||||||||||||
and | Manufacturing and | and | Manufacturing and | |||||||||||||||||||||||||||||
2023 | Cable Assembly | Assembly | Corporate | Total | ||||||||||||||||||||||||||||
Net sales | $ | 9,057 | $ | 9,286 | $ | - | $ | 18,343 | ||||||||||||||||||||||||
Income (loss) before benefit for income taxes | 246 | (921 | ) | (647 | ) | (1,322 | ) | |||||||||||||||||||||||||
Depreciation and amortization | 394 | 147 | - | 541 | ||||||||||||||||||||||||||||
Total assets | 50,973 | 24,966 | 9,201 | 85,140 | ||||||||||||||||||||||||||||
Cable Assembly | Assembly | Corporate | Total | |||||||||||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||
2022 | ||||||||||||||||||||||||||||||||
Net sales | $ | 2,630 | $ | 7,711 | $ | - | $ | 10,341 | $ | 3,923 | $ | 12,995 | $ | - | $ | 16,918 | ||||||||||||||||
Income (loss) from continuing operations before provision (benefit) for income taxes | (12 | ) | 566 | 3 | 557 | |||||||||||||||||||||||||||
Income (loss) before provision for income taxes | 56 | 314 | (727 | ) | (357 | ) | ||||||||||||||||||||||||||
Depreciation and amortization | 44 | 168 | - | 212 | 37 | 143 | - | 180 | ||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||
Net sales | $ | 2,535 | $ | 4,082 | $ | - | $ | 6,617 | ||||||||||||||||||||||||
Loss from continuing operations before benefit for income taxes | (18 | ) | (341 | ) | 20 | (339 | ) | |||||||||||||||||||||||||
Depreciation and amortization | 47 | 173 | - | 220 | ||||||||||||||||||||||||||||
Total assets | 7,572 | 24,635 | 17,529 | 49,736 |
Note 10 -– Income taxes
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down our net deferred tax liability as of October 31, 2017 by $41,000 to reflect the estimated impact of the Tax Act. While we have substantially completed our provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate of such effects, the net one-time charge related to the Tax Act may differ, possibly materially, due to, among other things, further refinement of our calculations, changes in interpretations and assumptions that we have made, additional guidance that may be issued by the U.S. Government, and actions and related accounting policy decisions we may take as a result of the Tax Act. We will complete our analysis over a one-year measurement period ending December 22, 2018, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined.
The Company usesuse an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates,we operate, to determine itsthe quarterly provision (benefit) for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The provision ( benefit) forWe recorded income taxes was 18%tax benefits of $160,000 and 30% of income (loss) before income taxes$80,000 for the three months ended January 31, 20182023 and 2017,2022, respectively. The decrease in the effective income tax rate from period to period was primarily driven by the reduction of the federal corporate income tax rate due to the Tax Act resulting in the recognition of a benefit of $41,000, recognition of a stock option windfall benefit of $19,000 related to the exercise of NQSOs and the benefit of R&D credits.The Company recorded income from discontinued operations, net of tax, as disclosed in Note 2.
The total amount of unrecognized tax benefits was $0 as of January 31, 2018 and October 31, 2017. The total balance of accrued interest and penalties related to uncertain tax positions was $0 as of January 31, 2018 and October 31, 2017. The Company recognizes interest and penalties related to uncertain tax positions, if any, as a component of income tax expense and the accrued interest and penalties, if any, are included in deferred and other long-term liabilities in the Company's condensed consolidated balance sheets. There were no material interest or penalties included in income tax expense12.3% for the three months ended January 31, 2018 or 2017.2023, compared to 22.3% for the three months ended January 31, 2022 was primarily driven by the increased benefit from research and development tax credits.
We had $199,000 and $121,000 of unrecognized tax benefits, inclusive of interest and penalties, as of January 31, 2023 and October 31, 2022, respectively. The unrecognized tax benefits, if recognized, would result in a net tax benefit of $195,000 as of January 31, 2023.
Note 11 -– Intangible assets
Intangible assets consist of the following (in thousands):
January 31, 2018 | October 31, 2017 | January 31, 2023 | October 31, 2022 | |||||||||||||
Amortizable intangible assets: | ||||||||||||||||
Non-compete agreement (estimated life 5 years) | $ | 423 | $ | 423 | ||||||||||||
Accumulated amortization | (345 | ) | (334 | ) | ||||||||||||
78 | 89 | |||||||||||||||
Customer relationships (estimated lives 7 - 15 years) | 5,099 | 5,099 | 6,058 | 6,058 | ||||||||||||
Accumulated amortization | (2,323 | ) | (2,186 | ) | (3,170 | ) | (3,074 | ) | ||||||||
2,776 | 2,913 | 2,888 | 2,984 | |||||||||||||
Patents (estimated life 14 years) | 142 | 142 | ||||||||||||||
Backlog (estimated life 1 - 2 years) | 327 | 327 | ||||||||||||||
Accumulated amortization | (323 | ) | (313 | ) | ||||||||||||
4 | 14 | |||||||||||||||
Patents (estimated life 10 - 14 years) | 368 | 368 | ||||||||||||||
Accumulated amortization | (151 | ) | (143 | ) | ||||||||||||
217 | 225 | |||||||||||||||
Tradename (estimated life 15 years) | 1,700 | 1,700 | ||||||||||||||
Accumulated amortization | (104 | ) | (76 | ) | ||||||||||||
1,596 | 1,624 | |||||||||||||||
Proprietary Technology (estimated life 10 years) | 11,100 | 11,100 | ||||||||||||||
Accumulated amortization | (27 | ) | (25 | ) | (1,018 | ) | (740 | ) | ||||||||
116 | 117 | 10,082 | 10,360 | |||||||||||||
Totals | $ | 2,891 | $ | 3,030 | $ | 14,865 | $ | 15,296 | ||||||||
Non-amortizable intangible assets: | ||||||||||||||||
Trademarks | $ | 1,237 | $ | 1,237 | $ | 1,174 | $ | 1,174 |
Amortization expense for the three months ended January 31, 2023 and the year ended October 31, 2022 was $431,000 and $1,282,000, respectively. As of January 31, 2023, the weighted-average amortization period for the amortizable intangible assets is 9.25 years.
Note 12 -– Commitments
We have operating leases for corporate offices, manufacturing facilities, and certain storage units. Our leases have remaining lease terms of one year to three years, some of which include options to extend the leases for up to five years. A portion of our operating leases are leased from K&K Unlimited, a company controlled by Darren Clark, the former owner and current President of Cables Unlimited, to whom we make rent payments totaling $16,000 per month.
We also have other operating leases for certain equipment. The components of our facilities and equipment operating lease expenses for the period ending January 31, 2023 were as follows (in thousands):
Three Months Ended | ||||
January 31, 2023 | ||||
Operating lease cost | $ | 762 |
Other information related to leases was as follows (in thousands):
January 31, 2023 | October 31, 2022 | |||||||
Supplemental Cash Flows Information | ||||||||
ROU assets obtained in exchange for lease obligations: | ||||||||
Operating leases | $ | - | $ | 13,352 | ||||
Weighted Average Remaining Lease Term | ||||||||
Operating leases (in months) | 113.94 | 113.72 | ||||||
Weighted Average Discount Rate | ||||||||
Operating leases | 3.75 | % | 3.75 | % |
Future minimum lease payments under non-cancellable leases as of January 31, 2023 were as follows:
Year ending October 31, | Operating Leases | |||
2023 (excluding three months ended January 31, 2023) | $ | 1,810 | ||
2024 | 1,991 | |||
2025 | 1,796 | |||
2026 | 1,835 | |||
2027 | 1,874 | |||
Thereafter | 10,618 | |||
Total future minimum lease payments | 19,924 | |||
Less imputed interest | (3,330 | ) | ||
Total | $ | 16,594 |
Reported as of January 31, 2023 | Operating Leases | |||
Other current liabilities | $ | 1,728 | ||
Operating lease liabilities | 14,866 | |||
Total | $ | 16,594 |
As of January 31, 2023, operating lease ROU asset was $12.7 million and operating lease liability totaled $16.5 million, of which $1.7 million is classified as current. There were no finance leases as of January 31, 2023.
The Company currently leases its corporate headquarters and RF connector and cable assembly manufacturingSchrofftech facilities, in San Diego, California. On June 5, 2017, the Company entered into a fifth amendment to its leaseconsisting of two buildings for its facility in San Diego, California. As a result, the Company now leases a total of approximately 21,90810,700 square feet, of office, warehouse and manufacturing space at its San Diego location. The term of the lease expires on Julyare leased by RF Industries, Ltd. under two leases that were renewed effective February 1, 2022 for two years expiring January 31, 2022, and the rental payments under the lease currently are $22,721 per month. The San Diego lease also requires the payment of the Company’s pro rata share of real estate taxes and insurance, maintenance and other operating expenses related to the facilities.
2024. The aggregate monthly rental payment under the new leases currently is $6,720 per month.
Note 13 – Term Loan and Line of credit
In February 2022, we entered into an agreement for alla revolving line of credit (the “Revolving Credit Facility”) in the amount of $3.0 million and a $17.0 million term loan (the “Term Loan”, and together with the Revolving Credit Facility, the “Credit Facility”). Amounts outstanding under the Revolving Credit Facility shall bear interest at a rate of 2.0% plus the Bloomberg Short-Term Bank Yield Index Rate (“base interest rate”). The maturity date of the Company’s facilities currentlyRevolving Credit Facility is approximately $53,000March 1, 2024. The Company drew down the entire amount of the Term Loan on March 1, 2022. The primary interest rate for Term Loan is 3.76% per month, plus utilities,annum. The maturity date of the Term Loan is March 1, 2027.
Borrowings under the Credit Facility are secured by a security interest in certain assets of the Company and contains certain loan covenants. The Credit Facility requires the maintenance of certain financial covenants, including: (i) consolidated debt to EBITDA ratio not to exceed 3.00 to 1.00; (ii) consolidated fixed charge coverage ratio of at least 1.25 to 1.00; and insurance.(iii) consolidated minimum EBITDA of at least $600,000 for the discrete quarter ending January 31, 2022. In addition, the Credit Facility contains customary affirmative and negative covenants.
As of January 31, 2023, we have borrowed $14,980,000 under the Term Loan while we have not borrowed any amounts under the Revolving Credit Facility.
Note 13 -14 – Cash dividend and declared dividends
The Company paidWe did not pay any dividends of $0.02 per share during the three months ended January 31, 2018 and 2017 for a total of $176,000 per period.2023, nor did we pay any dividends during the three months ended January 31, 2022.
Note 14 - Subsequent events
On March 8, 2018, the Board of Directors of the Company declared a quarterly cash dividend of $0.02 per share to be paid on April 15, 2018 to stockholders of record on March 31, 2018.
Item 2: Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements. These statements relate to future events or the Company’sour future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “except,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
Although the Company believeswe believe that the expectations reflected in the forward-looking statements are reasonable, the Companywe cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Company, nor any other person, assumes responsibility for the accuracy and completeness of the forward-looking statements. The Company isWe are under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in its expectations.
The following discussion should be read in conjunction with the Company’sour unaudited condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company’sour business, including without limitation the disclosures made under the caption “Management’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Risk “Risk Factors,” and the audited consolidated financial statements and related notes included in the Company’sour Annual Report filed on Form 10-K for the year ended October 31, 20172022 and other reports and filings made with the Securities and Exchange Commission.
Critical Accounting Policies
TheOur unaudited condensed consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to bad debts, inventory reserves, earn-out liabilities, and contingencies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Inventories
Inventories are stated at the lower of cost or market,net realizable value, with cost determined using the weighted average cost method of accounting. Certain items in inventory may be considered obsolete or excess and, as such, we periodically review our inventories for excess and slow moving items and make provisions as necessary to properly reflect inventory value. Because inventories have, during the past few years, represented up to one-fourth of our total assets, any reduction in the value of our inventories would require us to take write-offs that would affect our net worth and future earnings.
Allowance for Doubtful Accounts
The Company records itsWe record an allowance for doubtful accounts based upon itsour assessment of various factors. The Company considersWe consider historical experience, the age of the accounts receivable balance, credit quality of the Company’sour customers, current economic conditions and other factors that may affect a customer’s ability to pay.
Long-Lived Assets Including Goodwill
The Company assessesWe assess property, plant and equipment and intangible assets, which are considered definite-lived assets, for impairment. Definite-lived assets are reviewed when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value.
The Company amortizes itsWe amortize our intangible assets with definite useful lives over their estimated useful lives and reviewsreview these assets for impairment.
We test our goodwill and trademarks and indefinite-lived assets for impairment at least annually or more frequently if events or changes in circumstances indicate these assets may be impaired. These events or circumstances requiresrequire significant judgment and could include a significant change in the business climate, legal factors, operating performance indicators, competition and sale or disposition of all or a portion of a division. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.
Earn-out Liability
The purchase agreement for the Rel-Tech acquisition provides for earn-out payments of up to $800,000, payable through May 31, 2018. The fair value of the obligation under the earn-out purchase price arrangement for Rel-Tech was $206,000 as of January 31, 2018. The initial earn-out liability was valued at its fair value using the Monte Carlo simulation and is included as a component of the total purchase price. The earn-out was and will continue to be revalued quarterly using a present value approach and any resulting increase or decrease will be recorded into selling and general expenses. Any changes in the assumed timing and amount of the probability of payment scenarios could impact the fair value. Significant judgment is employed in determining the appropriateness of the assumptions used in calculating the fair value of the earn-out as of the acquisition date. Accordingly, significant variances between actual and forecasted results or changes in the assumptions can materially impact the amount of contingent consideration expense we record in future periods.
Income Taxes
The Company recordsWe record a tax provision for the anticipated tax consequences of the reported results of operations. Income taxes are accounted for under the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates as of the date of the financial statements that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company recordsWe record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
If a deduction reported on a tax return for an equity-based incentive award exceeds the cumulative compensation cost for those instruments recognized for financial reporting purposes, any resulting realized tax benefit that exceeds the previously calculated deferred tax asset for those instruments is considered an excess tax benefit, and is recognized as additional paid-in capital. If the tax deduction is less than the cumulative book compensation cost, the tax effect of the resulting difference is charged first to additional paid-in capital, to the extent of the available pool of windfall tax benefits, with any remainder recognized in income tax expense.
The calculation of the tax provision involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’sour financial condition and operating results.
Stock-based Compensation
The Company usesWe use the Black-Scholes model to value the stock option grants. This valuation is affected by the Company’sour stock price as well as assumptions regarding a number of inputs which involve significant judgments and estimates. These inputs include the expected term of employee stock options, the expected volatility of the stock price, the risk-free interest rate and expected dividends.
Overview
RF Industries, Ltd. (together with subsidiaries, the “Company”, “we”, “us”, or “our”) is a national manufacturer and marketer of interconnect products and systems, including high-performance components such as RF connectors and adapters, dividers, directional couplers and filters, coaxial and specialty cables, and connectors,data cables, wire harnesses, fiber optic cables, custom cabling, energy-efficient cooling systems and connectors, and electrical and electronic specialty cables and components.integrated small cell enclosures. Through its fourour manufacturing and production facilities, the Company provideswe provide a wide selection of interconnect products and solutions primarily to telecommunications carriers and equipment manufacturers, wireless and network infrastructure carriers and manufacturers Data Center and Co-location companies, and to various original equipment manufacturers (OEMs)(“OEMs”) in several market segments. We also design, engineer, manufacture and sell energy-efficient cooling systems and integrated small cell solutions and related components.
The Company operatesWe operate through two reporting segments: (i) the “RFRF Connector and Cable Assembly”Assembly (“RF Connector”) segment, and (ii) the “CustomCustom Cabling Manufacturing and Assembly”Assembly (“Custom Cabling”) segment. The RF Connector and Cable Assembly segment primarily designs, manufactures, markets and distributes a broad range of RF connector, adapter, coupler, divider, and cable products, including coaxial connectorspassives and cable assemblies that are integrated with coaxial connectors, used in telecommunications and information technology, OEM markets and other end markets. The Custom Cabling Manufacturing and Assembly segment designs, manufactures, markets and distributes custom copper and fiber cable assemblies, complex hybrid fiber optic and power solution cables, electromechanical wiring harnesses, data center products, and wiring harnesses for a broad range of applications in a diverse set of end markets. The two segments were determined based on the aggregation of operating divisions that have similar economic characteristicsmarkets, energy-efficient cooling systems for wireless base stations and are similar in the majority of the following areas: (1) the nature of the productremote equipment shelters and services; (2) the nature of the production process; (3) the type or class of customer for their productscustom designed, pole-ready 4G and services; (4) the methods used to distribute their products or services; and (5) if applicable, the nature of the regulatory environment.5G small cell integrated enclosures.
For the quarterthree months ended January 31, 2018, most2023, approximately half of the Company’sour revenues were generated from the Custom Cabling Manufacturing and Assembly segment from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, transceivers/converters and other data center equipment (whichwhich collectively accounted for 75%51% of the Company’s total sales for the quarter ended January 31, 2018).sales. Revenues from the RF Connector and Cable Assembly segment were generated from the sales of RF connector products and connector cable assemblies and accounted for 25%49% of the Company’s total sales for the quarterthree months ended January 31, 2018.2023. The RF Connector segment mostly sells standardized products regularly used by customers and, therefore, has a more stable revenue stream. On the other hand, the Custom Cabling segment mostly designs, manufactures, and sells customized cabling and wireless-related equipment under larger purchase orders. Accordingly, the Custom Cabling segment is more dependent upon larger orders, and its revenues are therefore, more volatile than the revenues of the RF Connector segment.
We recently moved into new corporate headquarters located at 16868 Via Del Campo Court, Suite 200, San Diego, CA 92127. Our phone number remains (858) 549-6340.
Liquidity and Capital Resources
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Management believes that existing current assets and the amount of cash it anticipates it will generate from current operations will be sufficientHistorically, we have been able to fund the anticipatedour liquidity and other capital resource needsrequirements from funds we generated from operations. On March 1, 2022, we acquired Microlab. In connection with the purchase of Microlab, we entered into the Company for at least twelve months fromCredit Facility and borrowed the full $17 million amount available under the Term Loan. As of the date of this filing. Management believesreport, we have not borrowed any amounts under the Revolving Credit Facility. We believe that itsour existing assets and the cash expectedwe expect to be generatedgenerate from operations including its(including those of Microlab) and from our current backlog of unfulfilled orders, will be sufficient to fund our liquidity needs during the current fiscal yearnext 12 months from the date of this filing based on the following:
As of January 31, 2018, the Company2023, we had a total of $5.9$3.8 million of cash and cash equivalents compared to a total of $6.0$4.5 million of cash and cash equivalents as of October 31, 2017.2022. As of January 31, 2018, the Company2023, we had working capital of $13.9$25.1 million and a current ratio of approximately 3.8:1.2.5:1 with current assets of $41.8 million and current liabilities of $16.7 million. On March 1, 2022, we used $7.3 million of our cash to fund a portion of the purchase price paid to acquire Microlab. Nevertheless, we believe that the amount of cash remaining, plus the amount available to us under the Revolving Credit Facility, will be sufficient to fund our anticipated liquidity needs.
Subsequent
As of January 31, 2023, we had $24.5 million of backlog, compared to the fiscal year ended October 31, 2017, the Company has seen an increase in orders for its products in each of its four divisions. As a result of these increased orders, the Company’s backlog has increased from $4.0$27.8 million as of October 31, 20172022. The decrease in backlog relates primarily to $20.2 million asshipments made against orders for our hybrid fiber cables. Since purchase orders are submitted from customers based on the timing of January 31, 2018. A substantial amounttheir requirements, our ability to predict orders in future periods or trends in future periods is limited. Furthermore, purchase orders may be subject to cancellation from customers, although we have not historically experienced material cancellations of this backlog is expected to be filled in the upcoming quarter ending April 30, 2018 and the remaining amount of the current backlog largely filled by the end of the current fiscal year ending October 31, 2018. Accordingly, the Company’s liquidity and available capital resources are also expected to materially increase in the current fiscal year.
purchase orders.
The Company used cash of $0.2 million duringIn the three months ended January 31, 2018 due largely to the impact2023, we generated $0.9 million of increased sales. As a result of the increased sales, accounts receivables ($1.5 million) and inventories ($0.7 million) increased, which was partially offset by increased accounts payable ($0.7 million) and accrued expenses ($0.5 million).cash in our operating activities. This net decrease ininflow of cash was partially offset byis primarily related to an increase in cash from net incomeother current assets of $2.7 million, the increase in deferred revenue of $1.1 million, the collections of accounts receivable of $0.8 million, $0.5 million noncash credits of $0.2 million primarily from depreciation and amortization, relatedand $0.2 million from stock-based compensation expense. The cash usage was primarily due to accrued expenses of $3.2 million, payments made to our accounts payable $0.8 million and our net loss of $1.2 million. The cash generated by other current assets represents $2.7 million which primarily consists of $1.5 million of reimbursement for tenant improvements and $1.2 million received from ERC.
During the acquisitions of Comnet, Rel-Techthree months ended January 31, 2023, we also spent $1.1 million on capital expenditures, and CompPro,$0.6 million in Term Loan payments. The cash used in operating activities and the amounts spent on capital expenditures were partially offset by $0.1 million of stock-based compensation expense. In addition, during the quarter the Companyproceeds that we received $0.2 million from the exercise of stock options and paid out $0.2 million in dividends.options.
The Company does not anticipate needingOur goal to expand and grow our business both organically and through acquisitions may require material additional capital equipment in the next twelve months.equipment. In the past, the Company haswe have purchased all additional equipment, or financed some of itsour equipment and furnishings requirements through capital leases. NoAt this time, we have not identified any additional capital equipment purchases have been currently identified that would require significant additional leasing or capital expenditures during the next twelve12 months. ManagementWe also believesbelieve that based on the Company’sour current financial condition, itsour current backlog of unfulfilled orders and itsour anticipated future operations, the Companywe would be able to finance itsour expansion, if necessary.
As part of its announced business plan, the Company may fromFrom time to time, acquirewe may undertake acquisitions of other companies or product lines in the future in order to diversify itsour product and solutions offerings and customer base. Any future acquisitionsConversely, we may undertake the disposition of a division or product line due to changes in our business strategy or market conditions. Acquisitions may require the Company to makeoutlay of cash, payments, which may reduce the Company’s futureour liquidity and capital resources while dispositions may increase our cash position, liquidity and capital resources. Since our goal is to continue to expand our operations and accelerate our growth through future acquisitions, we may use some of our current capital resources to fund any acquisitions we may undertake in the future.
Results of Operations
Three Months Ended January 31, 20182023 vs. Three Months Ended January 31, 20172022
Net sales of $10.3 million increased by 56%, or $3.7 million, for the three months ended January 31, 20182023 (the “fiscal 20182023 quarter”) whenincreased by 8.4%, or $1.4 million, to $18.3 million as compared to the three months ended January 31, 20172022 (the “fiscal 20172022 quarter”). Net sales for the fiscal 20182023 quarter at the Company’s “CustomCustom Cabling Manufacturing and Assembly” segment (Custom Cabling) increased $3.6decreased by $3.7 million, or 89%28.5%, whento $9.3 million, compared to $13.0 million in the fiscal 2022 quarter. The decrease was primarily the result of decreases in sales to customers in the Tier-1 wireless carrier ecosystem related to our small cell products and systems and our hybrid fiber cables compared to the fiscal 2017 quarter from the increased sale of fiber optics cable, copper cabling, custom patch cord assemblies, wiring harnesses, transceivers/converters and other data center equipment.prior year first quarter. Net sales for the fiscal 20182023 quarter at the RF Connector and Cable Assembly segment increased by $0.1$5.2 million, or 4%130.9%, to $2.6$9.1 million as compared to $2.5$3.9 million in the fiscal 2022 quarter, primarily due to the addition of Microlab which accounted for $5.1 million in sales.
Gross profit for the fiscal 2017 quarter.
The Company’s2023 quarter increased by $1.0 million to $5.1 million due to the increase in net sales, and gross profit as a percentagemargins increased to 27.7% of sales compared to 24.1% of sales in the fiscal 2018 quarter increased2022 quarter. This is primarily driven by 2% to 30% compared to 28% in the fiscal 2017 quarter due primarily to the increased revenues at the Custom Cabling division.addition of Microlab.
Engineering expenses increased $0.1by $0.5 million to $1.0 million in the fiscal 2023 quarter compared to $0.5 million in the fiscal 2022 quarter primarily due to the addition of Microlab which accounted for $0.3 million of the increase. We also incurred additional engineering expenses during the fiscal 2018 quarter to $0.3 million compared to $0.2 million for the fiscal 2017 quarter due to increased salary expense related to the engineering activities.efforts associated with our integrated systems products. Engineering expenses represent costs incurred relating to the ongoing research and development of current and new products.
Selling and general expenses increased by $0.2$1.3 million duringto $5.3 million (28.9% of sales) compared to $4.0 million (23.6% of sales) in the first quarter last year primarily due to Microlab expenses of $1.3 million. We also incurred a one-time expense related to severance of $50,000 and additional rent expense of $444,000 (of which $387,000 was non-cash) related to lease accounting in the fiscal 2018 quarter to $2.2 million from $2.0 million in the prior year. Selling and general as a percentage of sales declined to 21% for2023 quarter.
For the fiscal 20182023 quarter, the Custom Cabling segment had a pretax loss of $921,000 while the RF Connector segment had pretax income of $246,000, as compared to 30%$314,000 income and $56,000 of income, respectively, for the fiscal 2017 quarter.comparable first quarter last year. The increase in selling and general expensesthe pretax net income at the RF Connector segment was primarily due to increased compensationthe acquisition of Microlab. The decrease in pretax income at the Custom Cabling segment was due primarily to the decrease in sales of hybrid fiber cables to a tier-1 wireless customer and a decrease in sales of small cell products and systems to customers in the form of commissions and accrued bonuses.Tier-1 wireless ecosystem.
The provision (benefit)benefit for income taxes was 18%12% and 30%22% of income (loss)loss before income taxes for the three months ended January 31, 2018fiscal 2023 quarter and 2017,the fiscal 2022 quarter, respectively. The decreasechange in the effective income tax rate from periodthe fiscal 2022 quarter to periodfiscal 2023 quarter was primarily driven by the reduction of the federal corporate income tax rate due to the Tax Act and the benefit of R&D credits.
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down our net deferred tax liability as of October 31, 2017 by $41,000 to reflect the estimateddisproportionate impact of the Tax Act. While we have substantially completedvarious permanent book-tax differences with respect to our provisional analysis of theforecasted book income tax effects of the Tax Act and recorded a reasonable estimate of such effects, the net one-time charge related to the Tax Act may differ, possibly materially, due to, among other things, further refinement of our calculations, changesor loss in interpretations and assumptions that we have made, additional guidance that may be issued by the U.S. Government, and actions and related accounting policy decisions we may take as a result of the Tax Act. We will complete our analysis over a one-year measurement period ending December 22, 2018, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. All of the income from discontinued operations, net of tax, during the fiscal 2017 quarter was for royalty payments received under the agreement for the sale of the Company’s RadioMobile division. The period for earning royalties from RadioMobile has now expired.each period.
For the fiscal 20182023 quarter, net incomeloss was $0.5$1.2 million and fully diluted EPS was $0.05loss per share aswas $0.11 per share, compared to a net loss of $0.2 million$277,000 and fully diluted loss per share of net loss of $0.02$0.03 per share for the fiscal 20172022 quarter. For the fiscal 2023 quarter, the diluted weighted average shares outstanding was 10,222,540 as compared to 10,067,186 for the fiscal 2022 quarter.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Nothing to report.Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintainsWe maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
In designing and evaluating the disclosure controls and procedures, management recognizeswe recognize that any controls and procedures, no matter how well designed and operated, can provide reasonable assurance only of achieving the desired control objectives, and managementwe necessarily isare required to apply itsour judgment in weightingweighing the costs and benefits of possible new or different controls and procedures. Limitations are inherent in all control systems, so no evaluation of controls can provide absolute assurance that all control issues and any fraud have been detected. Because of the inherent limitations, we regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, and to maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
As described throughout our quarterly report, during the quarter ended April 30, 2022, we acquired Microlab, which is now a wholly owned subsidiary of RF Industries. We are currently integrating policies, processes, technology, and operations for the consolidated company and will continue to evaluate our internal control over financial reporting as we develop and execute our integration plans. Until we are fully integrated, we will maintain the operational integrity of each division’s internal control over financial reporting.
As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report, management,we, under the supervision and with the participation of our then Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, managementwe concluded that the Company’sour disclosure controls and procedures were effective as of that date.
There has beenChanges in Internal Control Over Financial Reporting
During the first quarter of fiscal 2023, there were no changechanges in the Company’s internal control over financial reporting duringas such term is defined in Rule 13a-15(f) of the quarter ended January 31, 2018exchange Act, that has materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. As of the date of this report, we are not subject to any proceeding that is not in the ordinary course of business or that is material to the financial condition of our business.
Item 1A. Risk Factors
The discussionOur business, financial condition, and operating results are affected by a number of our businessfactors, whether currently known or unknown, including risks specific to us or the interconnect industry, as well as risks that affect businesses in general. In addition to the information and operations should be read together with the risk factors containedset forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, of“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 20172022, filed with the SEC which describe variouson January 24, 2023. The risks disclosed in such Annual Report and uncertainties to which we are or may become subject. These risks and uncertainties have the potential toin this Quarterly Report could materially adversely affect our business, financial condition, cash flows, or results of operations cash flows, strategies or prospects in a material and adverse manner. Therethus our stock price. We believe there have been no material changes from thein our risk factors previouslyfrom those disclosed in the above-mentioned periodic report.Annual Report. However, additional risks and uncertainties not currently known or which we currently deem to be immaterial may also materially adversely affect our business, financial condition, or results of operations.
These risk factors may be important to understanding other statements in this Quarterly Report and should be read in conjunction with the consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q. Because of such risk factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
NothingThe following table sets forth information regarding the shares of common stock cancelled, and deemed to report.have been repurchased, during the three months ended January 31, 2023 in connection with employee tax withholding for shares of restricted stock that vested under our 2020 Equity Incentive Plan.
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs | ||||||||||||
November 2022 | - | $ | - | - | $ | - | ||||||||||
December 2022 | - | $ | - | - | $ | - | ||||||||||
January 2023 | 1,312 | $ | 5.46 | - | $ | - |
Item 3. Defaults upon Senior Securities
Nothing to report.
Item 4. Mine Safety Disclosures
Nothing to report.
Item 5. Other Information
NotingNothing to report.
Item 6. Exhibits
101.INS | Inline XBRL | |
101.SCH | Inline XBRL Taxonomy Schema. |
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase. | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase. | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase. | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase. |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RF INDUSTRIES, LTD. | |||
Date: March 13, | By: | /s/ Robert Dawson | |
Robert Dawson President and Chief Executive Officer (Principal Executive Officer) |
Date: March 13, | By: | /s/ | |
Chief Financial Officer (Principal Financial and Accounting Officer) |