Company Quick10K Filing
RF Industries
Price7.85 EPS0
Shares10 P/E22
MCap77 P/FCF-29
Net Debt-13 EBIT5
TEV65 TEV/EBIT14
TTM 2019-10-31, in MM, except price, ratios
10-Q 2020-04-30 Filed 2020-06-11
10-Q 2020-01-31 Filed 2020-03-12
10-K 2019-10-31 Filed 2019-12-20
10-Q 2019-07-31 Filed 2019-09-12
10-Q 2019-04-30 Filed 2019-06-12
10-Q 2019-01-31 Filed 2019-03-12
10-K 2018-10-31 Filed 2018-12-20
10-Q 2018-07-31 Filed 2018-09-12
10-Q 2018-04-30 Filed 2018-06-11
10-Q 2018-01-31 Filed 2018-03-13
10-K 2017-10-31 Filed 2018-01-24
10-Q 2017-07-31 Filed 2017-09-12
10-Q 2017-04-30 Filed 2017-06-13
10-Q 2017-01-31 Filed 2017-03-15
10-K 2016-10-31 Filed 2017-01-27
10-Q 2016-07-31 Filed 2016-09-14
10-Q 2016-04-30 Filed 2016-06-14
10-Q 2016-01-31 Filed 2016-03-21
10-K 2015-10-31 Filed 2016-01-28
10-Q 2015-07-31 Filed 2015-09-11
10-Q 2015-04-30 Filed 2015-06-15
10-Q 2015-01-31 Filed 2015-03-17
10-K 2014-10-31 Filed 2015-01-29
10-Q 2014-07-31 Filed 2014-09-11
10-Q 2014-04-30 Filed 2014-06-12
10-Q 2014-01-31 Filed 2014-03-13
10-K 2013-10-31 Filed 2014-01-17
10-Q 2013-07-31 Filed 2013-09-12
10-Q 2013-04-30 Filed 2013-06-12
10-Q 2013-01-31 Filed 2013-03-12
10-K 2012-10-31 Filed 2013-01-22
10-Q 2012-07-31 Filed 2012-09-14
10-Q 2012-04-30 Filed 2012-06-14
10-Q 2012-01-31 Filed 2012-03-15
10-K 2011-10-31 Filed 2012-01-27
10-Q 2011-07-31 Filed 2011-09-14
10-Q 2011-04-30 Filed 2011-06-08
10-Q 2011-01-31 Filed 2011-03-09
10-K 2010-10-31 Filed 2011-01-12
10-Q 2010-07-31 Filed 2010-09-13
10-Q 2010-04-30 Filed 2010-06-08
10-Q 2010-01-31 Filed 2010-03-11
10-K 2009-10-31 Filed 2010-01-29
8-K 2020-06-11
8-K 2020-05-05
8-K 2020-03-17
8-K 2020-03-12
8-K 2020-01-09
8-K 2019-12-18
8-K 2019-12-09
8-K 2019-11-04
8-K 2019-09-12
8-K 2019-09-09
8-K 2019-07-17
8-K 2019-06-07
8-K 2019-03-12
8-K 2019-03-11
8-K 2019-01-09
8-K 2018-12-20
8-K 2018-12-04
8-K 2018-12-03
8-K 2018-10-31
8-K 2018-09-12
8-K 2018-09-05
8-K 2018-07-12
8-K 2018-06-21
8-K 2018-06-11
8-K 2018-06-06
8-K 2018-03-13
8-K 2018-01-24

RFIL 10Q Quarterly Report

Part I. Financial Information
Item 1: Financial Statements
Note 1 - Unaudited Interim Condensed Consolidated Financial Statements
Note 2 - Business Acquisition
Note 3 - Inventories and Major Vendors
Note 4 - Other Current Assets
Note 5 - Accrued Expenses and Other Long - Term Liabilities
Note 6 - Earnings (Loss) per Share
Note 7 - Stock - Based Compensation and Equity Transactions
Note 8 - Concentrations of Credit Risk
Note 9 - Segment Information
Note 10 - Income Taxes
Note 11 - Intangible Assets
Note 12 - Commitments
Note 13 - Line of Credit
Note 14 - Cash Dividend and Declared Dividends
Note 15 - Subsequent Event
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex_188622.htm
EX-31.2 ex_188623.htm
EX-32.1 ex_188624.htm
EX-32.2 ex_188625.htm

RF Industries Earnings 2020-04-30

Balance SheetIncome StatementCash Flow
40322416802012201420172020
Assets, Equity
25191382-32012201420172020
Rev, G Profit, Net Income
2.81.70.5-0.6-1.8-2.92012201420172020
Ops, Inv, Fin

10-Q 1 rfil20200430b_10q.htm FORM 10-Q rfil20200430b_10q.htm
 
 

 



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 


 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 30, 2020

 

Commission file number: 000-13301

 


 

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.)

 

 

7610 Miramar Road, Building 6000
San Diego, California

92126

(Address of principal executive offices)

(Zip Code)

(858) 549-6340

(Registrant’s telephone number, including area code)

 


 

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. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted 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 such files.) Yes ☒ No ☐

 

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. ☐ 

 

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

 

The number of shares of the issuer’s Common Stock, par value $0.01 per share, outstanding as of May 29, 2020 was 9,758,062.

 



      

1

 

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)

  

   

April 30,

   

October 31,

 
   

2020

   

2019

 
   

(Unaudited)

   

(Note 1)

 

ASSETS

               
                 

CURRENT ASSETS

               

Cash and cash equivalents

  $ 14,076     $ 12,540  

Trade accounts receivable, net of allowance for doubtful accounts of $38 and $23, respectively

    4,950       12,190  

Inventories

    9,100       8,245  

Other current assets

    1,121       685  

TOTAL CURRENT ASSETS

    29,247       33,660  
                 

Property and equipment:

               

Equipment and tooling

    3,654       3,602  

Furniture and office equipment

    1,066       998  
      4,720       4,600  

Less accumulated depreciation

    3,923       3,761  

Total property and equipment, net

    797       839  
                 

Operating lease right of use assets, net

    1,901       -  

Goodwill

    2,697       1,340  

Amortizable intangible assets, net

    3,527       1,092  

Non-amortizable intangible assets

    1,174       657  

Other assets

    69       112  

TOTAL ASSETS

  $ 39,412     $ 37,700  

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

2

 

Item 1: Financial Statements (continued)

 

RF INDUSTRIES, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

   

April 30,

   

October 31,

 
   

2020

   

2019

 
   

(Unaudited)

   

(Note 1)

 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

CURRENT LIABILITIES

               

Accounts payable

  $ 1,454     $ 2,406  

Accrued expenses

    3,305       3,653  

Income taxes payable

    -       21  

Other current liabilities

    977       -  

TOTAL CURRENT LIABILITIES

    5,736       6,080  
                 

Deferred tax liabilities

    91       -  

Operating lease liabilities

    1,023       -  

Other long-term liabilities

    869       87  

TOTAL LIABILITIES

    7,719       6,167  
                 

COMMITMENTS AND CONTINGENCIES

               
                 

STOCKHOLDERS’ EQUITY

               

Common stock - authorized 20,000,000 shares of $0.01 par value; 9,758,062 and 9,462,267 shares issued and outstanding at April 30, 2020 and October 31, 2019, respectively

    98       95  

Additional paid-in capital

    22,652       21,949  

Retained earnings

    8,943       9,489  

TOTAL STOCKHOLDERS' EQUITY

    31,693       31,533  

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 39,412     $ 37,700  

 

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 April 30,

   

Six Months Ended April 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net sales

  $ 10,390     $ 13,626     $ 22,804     $ 24,273  

Cost of sales

    7,804       9,532       16,965       17,033  
                                 

Gross profit

    2,586       4,094       5,839       7,240  
                                 

Operating expenses:

                               

Engineering

    528       332       1,124       652  

Selling and general

    2,246       2,400       4,902       4,439  

Total operating expenses

    2,774       2,732       6,026       5,091  
                                 

Operating (loss) income

    (188 )     1,362       (187 )     2,149  
                                 

Other income

    7       14       18       35  
                                 

(Loss) income before provision (benefit) for income taxes

    (181 )     1,376       (169 )     2,184  

Provision (benefit) for income taxes

    3       315       (11 )     483  
                                 

Consolidated net (loss) income

  $ (184 )   $ 1,061     $ (158 )   $ 1,701  
                                 

(Loss) earnings per share

                               

Basic

  $ (0.02 )   $ 0.11     $ (0.02 )   $ 0.18  

Diluted

  $ (0.02 )   $ 0.11     $ (0.02 )   $ 0.17  
                                 

Weighted average shares outstanding

                               

Basic

    9,704,880       9,356,660       9,633,935       9,332,665  

Diluted

    9,704,880       9,837,964       9,633,935       9,837,718  

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

  

4

 

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 April 30, 2020

 
                   

Additional

                 
   

Common Stock

   

Paid-In

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 

Balance, January 31, 2020

    9,745,135     $ 98     $ 22,524     $ 9,322     $ 31,944  
                                         

Exercise of stock options

    12,927       -       32       -       32  
                                         

Stock-based compensation expense

    -       -       96       -       96  
                                         

Dividends

    -       -       -       (195 )     (195 )
                                         

Consolidated net loss

    -       -       -       (184 )     (184 )
                                         

Balance, April 30, 2020

    9,758,062     $ 98     $ 22,652     $ 8,943     $ 31,693  

 

 

   

For the Six Months ended April 30, 2020

 
                   

Additional

                 
   

Common Stock

   

Paid-In

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 

Balance, November 1, 2019

    9,462,267     $ 95     $ 21,949     $ 9,489     $ 31,533  
                                         

Exercise of stock options

    228,870       2       421       -       423  
                                         

Stock-based compensation expense

    -       -       206       -       206  
                                         

Issuance of restricted stock

    54,850       1       (1 )     -       -  
                                         

Issuance of common shares

    12,075       -       77       -       77  
                                         

Dividends

    -       -       -       (388 )     (388 )
                                         

Consolidated net loss

    -       -       -       (158 )     (158 )
                                         

Balance, April 30, 2020

    9,758,062     $ 98     $ 22,652     $ 8,943     $ 31,693  

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5

 

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 April 30, 2019

 
                   

Additional

                 
   

Common Stock

   

Paid-In

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 

Balance, January 31, 2019

    9,356,935     $ 94     $ 21,429     $ 7,170     $ 28,693  
                                         

Exercise of stock options

    3,416       -       15       -       15  
                                         

Stock-based compensation expense

    -       -       78       -       78  
                                         

Dividends

    -       -       -       (187 )     (187 )
                                         

Consolidated net income

    -       -       -       1,061       1,061  
                                         

Balance, April 30, 2019

    9,360,351     $ 94     $ 21,522     $ 8,044     $ 29,660  

 

 

   

For the Six Months ended April 30, 2019

 
                   

Additional

                 
   

Common Stock

   

Paid-In

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 

Balance, November 1, 2018

    9,291,201     $ 93     $ 20,974     $ 6,716     $ 27,783  
                                         

Exercise of stock options

    69,150       1       356       -       357  
                                         

Stock-based compensation expense

    -       -       192       -       192  
                                         

Dividends

    -       -       -       (373 )     (373 )
                                         

Consolidated net income

    -       -       -       1,701       1,701  
                                         

Balance, April 30, 2019

    9,360,351     $ 94     $ 21,522     $ 8,044     $ 29,660  

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

6

 

Item 1: Financial Statements (continued)

 

 

RF INDUSTRIES, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

   

Six Months Ended April 30,

 
   

2020

   

2019

 

OPERATING ACTIVITIES:

               

Consolidated net (loss) income

  $ (158 )   $ 1,701  
                 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Bad debt expense

    12       7  

Depreciation and amortization

    508       278  

Stock-based compensation expense

    283       192  

Deferred income taxes

    136       -  

Changes in operating assets and liabilities:

               

Trade accounts receivable

    7,499       (2,375 )

Inventories

    (72 )     (345 )

Other current assets

    (420 )     167  

Right of use assets

    99       -  

Other long-term assets

    (2 )     -  

Accounts payable

    (1,060 )     (721 )

Accrued expenses

    (872 )     (786 )

Income tax payable

    (21 )     -  

Other long-term liabilities

    (467 )     76  

Net cash provided by (used in) operating activities

    5,465       (1,806 )
                 

INVESTING ACTIVITIES:

               

Capital expenditures

    (63 )     (199 )

Purchase of C Enterprises, net of cash acquired ($143)

    -       (457 )

Purchase of Schrofftech, net of cash acquired ($99)

    (3,901 )     -  

Net cash used in investing activities

    (3,964 )     (656 )
                 

FINANCING ACTIVITIES:

               

Proceeds from exercise of stock options

    423       357  

Dividends paid

    (388 )     (373 )

Net cash provided by (used in) financing activities

    35       (16 )
                 

Net increase (decrease) in cash and cash equivalents

    1,536       (2,478 )
                 

Cash and cash equivalents of continuing operations, beginning of period

    12,540       16,334  
                 

Cash and cash equivalents, end of period

  $ 14,076     $ 13,856  
                 

Supplemental cash flow information – income taxes paid

  $ 395     $ 255  

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

7

 

RF INDUSTRIES, LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1Unaudited interim condensed consolidated financial statements

 

Our accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America 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 America 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, 2019 has been derived from, and certain terms used herein are defined in, the audited consolidated financial statements of RF Industries, Ltd. as of October 31, 2019 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2019 that was previously filed with the Securities and Exchange Commission (“SEC”). Operating results for the six months ended April 30, 2020 are not necessarily indicative of the results that may be expected for the year ending October 31, 2020. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended October 31, 2019.

 

Principles of consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of RF Industries, Ltd. and our four wholly-owned subsidiaries, Cables Unlimited, Inc. (“Cables Unlimited”), Rel-Tech Electronics, Inc. (“Rel-Tech”), C Enterprises, Inc. (“C Enterprises”), and Schroff Technologies International, Inc. (“Schrofftech”). C Enterprises is a wholly-owned subsidiary that RF Industries, Ltd. acquired effective March 15, 2019. For periods on or before January 31, 2019, references herein to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, and Rel-Tech, and periods between January 31, 2019 and October 31, 2019, references to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, and C Enterprises. Schrofftech is a wholly-owned subsidiary that RF Industries, Ltd. acquired effective November 1, 2019. For periods after October 31, 2019, references to the “Company” shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech. All intercompany balances and transactions have been eliminated in consolidation.

 

Risks and uncertainties

 

In March 2020, the World Health Organization (the “WHO”) declared coronavirus (COVID-19) a pandemic emergency. The COVID-19 pandemic has negatively impacted regional and global economies, disrupted global supply chains, and created significant volatility and disruption of financial markets. The global impact of the outbreak has been rapidly evolving and certain jurisdictions, including those where we have operations, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, social distancing protocols and restrictions on types of business that may continue to operate. While we have been deemed an “essential” business, and therefore have been permitted to continue our operations, the impact of the COVID-19 pandemic has affected both our operations and those of our customers. Our operations have been negatively affected by partial shutdowns of our facilities (particularly in the Northeast), by changes that we had to make on our operating methods and procedures, and by our reduced workforce as many of our employees stayed at home. Many of our customers and vendors have likewise had temporary closures of their facilities and have otherwise been impacted by changes in their industries. As a result, overall demand for our products has been reduced, and certain costs have increased. We have taken measures to protect the health and safety of our employees, and we continue to work with our customers and vendors to minimize potential disruptions in addressing the challenges posed by this global pandemic.

 

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by domestic and international jurisdictions to prevent disease spread, all of which are uncertain and cannot be predicted. The outbreak impacted our performance for the three and six months ended April 30, 2020. We currently expect the decline caused by the economic slowdown to persist through the remainder of 2020. The operations of our Cables Unlimited, Inc. subsidiary in Long Island, New York, was particularly affected as many employees stayed at home and as local customers shut down or otherwise delayed, deferred or cancelled orders for our products. Because of the severe impact that COVID-19 has on our Northeastern operations, in May 2020 we applied for and received a $2.8 million of loans (the “PPP Loans”) under the Paycheck Protection Program of the CARES Act. The funds from the PPP Loans are being used to retain employees, maintain payroll and benefits, and make lease and utility payments. Without the PPP Loans, we would have made material reductions in our workforce (particularly at Cables Unlimited). We anticipate that most of the PPP Loans will be eligible for forgiveness in accordance with the provisions of the CARES Act. To the extent not forgiven, the PPP Loans have a two-year term, a fixed interest rate of 1%, and principal and interest payments are deferred for six months.

 

8

 

Fair value measurement

 

We measure at fair value certain financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. 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 our 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.

 

As of April 30, 2020 and October 31, 2019, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximated their carrying value due to their short-term nature. See Note 5 for discussion on the fair value of other long-term liabilities.

 

Revenue recognition

 

In accordance with Accounting Standards Update ASU No. 2014-09, Revenue from Contacts with Customers (Topic 606) (“ASC 606”), we recognize revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. We follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue when (or as) each performance obligation is satisfied. In accordance with this accounting principle, we recognize revenue using the output method at a point in time when finished goods have been transferred to the customer and there are no other obligations to customers after the control of the goods have transferred. Control of goods are transferred based on shipping terms for each customer – for shipments with terms of FOB Shipping Point, control is transferred upon shipment; for shipments with terms of FOB Destination, control is transferred upon delivery.

 

Leases

 

In accordance with ASU No. 2016-02, Leases, we determine if an arrangement is a lease at inception. Operating leases are included in our consolidated balance sheet as operating lease right of use (“ROU”) assets, other current liabilities, and operating lease liabilities. Finance leases are included in finance ROU assets, other current liabilities, and finance lease liabilities on our consolidated balance sheet. ROU assets represent our right to use an underlying asset for the duration of the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term and is recognized on the consolidated statements of operations.

 

Recent accounting standards

 

Recently issued accounting pronouncements not yet adopted:

 

In January 2017, the FASB issued ASU 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. We are currently evaluating the impact the adoption of this new standard will have on our consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be 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 the financial asset. The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact the adoption of this new standard will have on our consolidated financial statements.

 

Recently issued accounting pronouncements adopted:

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU requires lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under the current GAAP. Under ASU 2016-02, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients. We adopted the standard as of November 1, 2019, the beginning of our fiscal 2020, applying the modified retrospective method. We elected the package of practical expedients permitted under the transition guidance with the new standard, which among other things, allows us to carryforward the historical lease classification. We elected the policy which allows us to combine the nonlease components with its related lease components rather than separating, and the policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We have recognized those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The adoption of the standard resulted in a material recognition of additional right of use assets and lease liabilities of approximately $2.3 million and $2.4 million, respectively, as of November 1, 2019, but did not materially affect our consolidated net income.

 

9

 

 

Note 2 – Business Acquisition

 

C Enterprises, Inc.

 

On March 15, 2019, through C Enterprises, Inc. (“C Enterprises”), its newly formed subsidiary, we purchased the business and assets of C Enterprises L.P., a California based designer and manufacturer of quality connectivity solutions to telecommunications and data communications distributors. In consideration for the C Enterprises business and assets, we paid $600,000 in cash and assumed certain liabilities. The acquisition was determined not to be material and was accounted for in accordance with the acquisition method of accounting. The acquired assets and assumed liabilities were recorded at their estimated fair values in accordance with ASC 805, Business Combinations. There were no intangible assets identified as part of the acquisition.

 

The results of C Enterprises’ operations subsequent to March 15, 2019 have been included in the results of the Custom Cabling Manufacturing and Assembly segment (“Custom Cabling segment”) as well as in the consolidated statements of operations. Costs related to the acquisition of C Enterprises were approximately $100,000 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 value at March 15, 2019:

 

Cash consideration paid

  $ 600,000  

Total purchase price

  $ 600,000  

 

The following table summarizes the allocation of the estimated purchase price at fair value at March 15, 2019:

 

Current assets

  $ 2,008,000  

Fixed assets

    30,000  

Other assets

    18,000  

Non-interest bearing liabilities

    (1,456,000 )

Net assets

  $ 600,000  

 

Schroff Technologies International, Inc.

 

On November 4, 2019, we purchased the business of Schroff Technologies International, Inc. (“Schrofftech”), a Rhode Island-based manufacturer and marketer of intelligent thermal control systems used by telecommunications companies across the U.S. and Canada, and shrouds for small cell integration and installation. At the closing, in consideration for the Schrofftech business, we paid the sellers $4 million in cash, and, if certain financial targets are met by Schrofftech over a two-year period, agreed to pay additional cash earn-out payments of up to $2.4 million.

 

The acquisition was accounted for as an acquisition of a business in accordance 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. Schrofftech serves the high growth wireless, telecom and cable markets. All manufacturing operations are performed at Schrofftech’s facilities in Rhode Island. The Schrofftech business allows us to diversify the types of services provided for our customers in the cable industry.

 

Although the closing occurred on November 4, 2019, the acquisition of Schrofftech is deemed to have become effective for financial accounting purposes as of November 1, 2019. Accordingly, Schrofftech’s financial results have been included in the results of the Custom Cabling segment for the three and six months ended April 30, 2020 as well as in the consolidated statements of operations. Total costs related to the acquisition of Schrofftech were approximately $151,000, of which $108,000 was incurred in fiscal 2019 and $43,000 was incurred in the six months ended April 30, 2020. All acquisition-related costs have been expensed as incurred and categorized in selling and general expenses. For the three months ended April 30, 2020, Schrofftech contributed revenue and pretax loss of $1.1 million and $95,000, respectively. For the six months ended April 30, 2020, Schrofftech contributed revenue and pretax loss of $2.3 million and $13,000, respectively.

 

The following table summarizes the components of the purchase price at fair values at November 1, 2019:

 

Cash consideration paid

  $ 4,000,000  

Earn-out liability

    1,249,000  

Total purchase price

  $ 5,249,000  

 

10

 

The following table summarizes the allocation of the purchase price at fair value at November 1, 2019:

 

Current assets

  $ 1,168,000  

Fixed assets

    58,000  

Intangible assets

    3,299,000  

Goodwill

    1,356,000  

Non-interest bearing liabilities

    (632,000 )

Net assets

  $ 5,249,000  

 

The following unaudited pro forma financial information presents the combined operating results of the Company, C Enterprises, and Schrofftech 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 C Enterprises and Schrofftech as of November 1, 2018 is presented in the following table:

 

   

Three Months Ended April 30,

   

Six Months Ended April 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Revenue

  $ 10,390     $ 18,901     $ 22,804     $ 35,100  

Net (loss) income

    (184 )     1,371       (158 )     2,744  
                                 

(Loss) earnings per share

                               

Basic

  $ (0.02 )   $ 0.15     $ (0.02 )   $ 0.29  

Diluted

  $ (0.02 )   $ 0.14     $ (0.02 )   $ 0.28  

 

 

Note 3Inventories 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): 

 

   

April 30, 2020

   

October 31, 2019

 
                 

Raw materials and supplies

  $ 4,289     $ 3,576  

Work in process

    434       791  

Finished goods

    4,377       3,878  
                 

Totals

  $ 9,100     $ 8,245  

 

No vendors accounted for more than 10% of inventory purchases for the three or six months ended April 30, 2020. For the three months ended April 30, 2019, two vendors accounted for 11% and 10% of inventory purchases. One of these vendors accounted for 14% of inventory purchases for the six months ended April 30, 2019, while a different vendor accounted for 13% of inventory purchases. We have arrangements with these vendors to purchase products based on purchase orders that we periodically issue.

 

 

Note 4 – Other current assets

 

Other current assets consist of the following (in thousands): 

 

   

April 30, 2020

   

October 31, 2019

 
                 

Prepaid taxes

  $ 522     $ -  

Prepaid expense

    436       346  

Other

    163       339  
                 

Totals

  $ 1,121     $ 685  

 

11

 

 

Note 5Accrued expenses and other long-term liabilities

 

Accrued expenses consist of the following (in thousands):

 

   

April 30, 2020

   

October 31, 2019

 
                 

Wages payable

  $ 1,069     $ 1,591  

Accrued receipts

    1,562       1,683  

Warranty liability

    210       -  

Deferred revenue

    258       -  

Other accrued expenses

    206       379  
                 

Totals

  $ 3,305     $ 3,653  

 

 Accrued receipts represent purchased inventory for which invoices have not been received.

 

We recognize an accrued warranty liability for the estimated claims to remedy potential deficiencies of quality or performance of our products in the Schrofftech division within the Custom Cabling segment. The product warranties extend over various periods, depending upon the product subject to the warranty. We record a provision for estimated future warranty claims based upon the historical relationship of warranty claims to sales, any specifically identified warranty issues and current trends and knowledge. We base our estimates in part on historical experience and on assumptions that are believed to be reasonable under the circumstances and revise our estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is reasonably possible that they may ultimately differ materially from actual results, including in the case of a significant product failure. Warranty related expenses have not been material and were not material for the three and six months ended April 30, 2020. Warranty liabilities were $210,000 as of April 30, 2020.

 

The purchase agreement for the Schrofftech acquisition provides for earn-out payments of up to $2,400,000, which is earned through October 31, 2022. The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure. 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 amount of the actual results and forecasted 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.

 

The contingent consideration liability represents future earn-out liability that we may be required to pay in conjunction with the acquisition of Schrofftech. We estimate the fair value of the earn-out liability using an option pricing based approach with a risk-neutral framework using Black Scholes related to Schrofftech 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 April 30, 2020 (in thousands):

 

Description

 

Level 1

   

Level 2

   

Level 3

 

Earn-out liability

  $ -     $ -     $ 869  


There were no financial assets or liabilities measured at fair value as of October 31, 2019.

 

The following table summarizes the Level 3 transactions for the three months ended April 30, 2020 and January 31, 2020 (in thousands):

 

   

Level 3

 
   

April 30, 2020

   

January 31, 2020

   

October 31, 2019

 

Beginning balance

  $ 1,215     $ 1,249     $ -  

Payments

    -       -       -  

Change in value

    (346 )     (34 )     -  

Ending Balance

  $ 869     $ 1,215     $ -  

 

As of April 30, 2020, the full amount of the $0.9 million earn-out was classified as other long-term liabilities.

 

12

 

 

Note 6Earnings (loss) per share

 

Basic earnings (loss) per share is computed by dividing net income (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. Potentially issuable securities totaling 392,838 and 121,015 shares for the three months ended April 30, 2020 and 2019, respectively, and 392,838 and 121,015 shares for the six months ended April 30, 2020 and 2019, respectively, 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 April 30,

   

Six Months Ended April 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Weighted average shares outstanding for basic (loss) earnings per share

    9,704,880       9,356,660       9,633,935       9,332,665  
                                 

Add effects of potentially dilutive securities-assumed exercise of stock options

    -       481,304       -       505,053  
                                 

Weighted average shares outstanding for diluted (loss) earnings per share

    9,704,880       9,837,964       9,633,935       9,837,718  

 

 

Note 7Stock-based compensation and equity transactions

 

On December 3, 2018, two employees were each granted 25,000 incentive stock options. These options vested 5,000 each on the date of grant, and the balance vests as to 5,000 shares each per year thereafter on each of the next four anniversaries of December 3, 2018, and expire ten years from the date of grant. Also on December 3, 2018, one employee was granted 10,000 incentive stock options. These options vested 2,000 shares on the date of grant, and the balance vests as to 2,000 shares per year thereafter on each of the next four anniversaries of December 3, 2018, and expire ten years from the date of grant.

 

On March 8, 2019, one employee was granted 25,000 incentive stock options. These options vested 5,000 on the date of grant, and the balance vests as to 5,000 shares per year thereafter on each of the next four anniversaries of March 8, 2019, and expire ten years from the date of grant.

 

On December 6, 2019, one employee was granted 50,000 incentive stock options. These options vested 10,000 on the date of grant, and the balance vests as to 10,000 shares per year thereafter on each of the next four anniversaries of December 6, 2019, and expire ten years from the date of grant.

 

On January 9, 2020, we granted the following equity awards to our managers and officers:

 

 

Stock grants for a total of 12,075 common shares to three employees. We accounted for these shares as stock-based compensation totaling $77,000;

 

A total of 3,241 incentive stock options to two employees, all of which vested immediately on the date of grant; and

 

A total of 38,500 shares of restricted stock and 77,000 incentive stock options to five employees. The shares of restricted stock and incentive stock options vest over four years as follows: (i) one-quarter of the restricted shares and options shall vest on January 9, 2021; and (ii) the remaining restricted shares and options shall vest in twelve equal quarterly installments over the next three years, commencing with the first quarter following January 9, 2021. All incentive stock options expire ten years from the date of grant.

 

No other shares or options were granted to company employees during the three and six months ended April 30, 2020 and 2019.

 

The weighted average fair value of employee stock options that were granted during the six months ended April 30, 2020 and 2019 was estimated to be $3.13 and $4.00, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:

 

   

Six Months Ended April 30,

 
   

2020

   

2019

 

Risk-free interest rate

    1.57 %     2.88 %

Dividend yield

    1.23 %     0.98 %

Expected life of the option (in years)

    6.47       5.96  

Volatility factor

    49.14 %     55.25 %

 

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 2020 and 2019 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.

 

13

 

Company stock option plans

 

Descriptions of our stock option plans are included in Note 10 of our Annual Report on Form 10-K for the year ended October 31, 2019. A summary of the status of the options granted under our stock option plans as of April 30, 2020 and the changes in options outstanding during the six months then ended is presented in the table that follows:

 

           

Weighted

 
           

Average

 
   

Shares

   

Exercise Price

 

Outstanding at November 1, 2019

    890,147     $ 3.62  

Options granted

    130,241     $ 6.53  

Options exercised

    (228,870 )   $ 1.85  

Options outstanding at April 30, 2020

    791,518     $ 4.61  

Options exercisable at April 30, 2020

    419,352     $ 4.37  

Options vested and expected to vest at April 30, 2020

    790,482     $ 4.62  

 

Weighted average remaining contractual life of options outstanding as of April 30, 2020: 5.53 years

 

Weighted average remaining contractual life of options exercisable as of April 30, 2020: 3.58 years

 

Weighted average remaining contractual life of options vested and expected to vest as of April 30, 2020: 5.52 years

 

Aggregate intrinsic value of options outstanding at April 30, 2020: $1,224,000

 

Aggregate intrinsic value of options exercisable at April 30, 2020: $719,000

 

Aggregate intrinsic value of options vested and expected to vest at April 30, 2020: $1,216,000

 

As of April 30, 2020, $713,000 and $284,000 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 4.42 and 1.40 years, respectively.

 

Non-employee directors receive a compensation package of $50,000 annually, which is paid one-half in cash and one-half through the grant of non-qualified awards. For fiscal 2020, compensation payable to non-employee directors will be prorated from November 1, 2019 through August 31, 2020. On November 4, 2019, we granted each of our five non-employee directors 3,270 shares of restricted stock. The number of restricted shares granted to each director was determined by prorating $25,000 for the 10 months ending August 31, 2020 and dividing by the 20-day average RFIL stock price ($6.36). These restricted shares vest ratably through August 31, 2020.

 

Stock option expense

 

During the three months ended April 30, 2020 and 2019, stock-based compensation expense totaled $96,000 and $78,000, respectively, and was classified in selling and general expense. During the six months ended April 30, 2020 and 2019, stock-based compensation expense totaled $283,000 and $192,000, respectively, and was classified in selling and general expenses.

 

 

Note 8Concentrations 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 April 30, 2020, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $12.5 million.

 

For the three months ending April 30, 2020, two customers, both distributors, accounted for approximately 11% and 17% of net sales. These same two distributors accounted for 11% and 14%, respectively, of net sales for the six months ending April 30, 2020, while in the same six-month period another customer, a wireless carrier, accounted for 11% of net sales. The two distributors had accounts receivable balances that accounted for 14% and 19%, respectively, of the total net accounts receivable balance at April 30, 2020. For the three months ending April 30, 2019, one of the aforementioned distributors and the wireless carrier accounted for approximately 28% and 14%, respectively, of net sales. This same distributor and a different wireless carrier accounted for approximately 32% and 10%, respectively, of net sales for the six months ending April 30, 2019. At April 30, 2019, the two wireless carrier customers had accounts receivable balances that accounted for approximately 10% and 21% of the total net accounts receivable balance, while the two distributors accounted for 18% and 15% of the 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 obligations and they could stop buying our products at any time and for any reason. A reduction, delay or cancellation of orders from these customers or the loss of these customers could significantly reduce our future revenues and profits.

 

14

 

 

Note 9Segment information

   

We aggregate operating divisions into two 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; (5) if applicable, the nature of the regulatory environment. Based upon this evaluation, as of April 30, 2020, we had two segments – RF Connector and Cable Assembly (“RF Connector segment”) and Custom Cabling Manufacturing and Assembly (“Custom Cabling segment”).

 

The RF Connector segment consisted of one division and the Custom Cabling segment was composed of four divisions. The five divisions that met the quantitative thresholds for segment reporting are the RF Connector and Cable Assembly division (“RF Connector division”), Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech. While each segment has similar products and services, there was 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 the end customer.

 

Management identifies 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 division constitutes the RF Connector segment, and the Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech divisions constitute the Custom Cabling segment.

 

As reviewed by our chief operating decision maker, we evaluate the performance of each segment based on income or loss before income taxes. We 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 all of our operations are conducted in the United States; however, we derive a portion of our revenue from export sales. We attribute sales to geographic areas based on the location of the customers. The following table presents the sales by geographic area for the three and six months ended April 30, 2020 and 2019 (in thousands):

 

   

Three Months Ended April 30,

   

Six Months Ended April 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

United States

  $ 9,982     $ 13,451     $ 22,155     $ 23,921  

Foreign Countries:

                               

Canada

    290       113       407       278  

Mexico

    7       -       12       -  

All Other

    111       62       230       74  
      408       175       649       352  
                                 

Totals

  $ 10,390     $ 13,626     $ 22,804     $ 24,273  

 

Net sales, income (loss) before provision for income taxes and other related segment information for the three months ended April 30, 2020 and 2019 are as follows (in thousands): 

  

    RF Connector

and

Cable Assembly

   

Custom Cabling

Manufacturing and

Assembly

   

Corporate

   

Total

 
2020                                

Net sales

  $ 3,768     $ 6,622     $ -     $ 10,390  

Income (loss) before provision for income taxes

    697       (885 )     7       (181 )

Depreciation and amortization

    41       212       -       253  

Total assets

    8,126       16,021       15,265       39,412  
                                 

2019

                               

Net sales

  $ 3,341     $ 10,285     $ -     $ 13,626  

Income before provision for income taxes

    257       1,105       14       1,376  

Depreciation and amortization

    45       96       -       141  

Total assets

    6,972       12,773       14,660       34,405  

 

15

 

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the six months ended April 30, 2020 and 2019 are as follows (in thousands):

 

 

 

RF Connector

and

Cable Assembly

   

Custom Cabling

Manufacturing and

Assembly

   

Corporate

   

Total

 
2020                                

Net sales

  $ 6,957     $ 15,847     $ -     $ 22,804  

Income (loss) before benefit for income taxes

    979       (1,166 )     18       (169 )

Depreciation and amortization

    83       425       -       508  

Total assets

    8,126       16,021       15,265       39,412  
                                 

2019

                               

Net sales

  $ 6,599     $ 17,674     $ -     $ 24,273  

Income before provision for income taxes

    537       1,611       36       2,184  

Depreciation and amortization

    90       188       -       278  

Total assets

    6,972       12,773       14,660       34,405  

 

 

Note 10Income taxes

  

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effects of the COVID-19 pandemic. The CARES Act includes several provisions that provide economic relief for individuals and businesses. The Company continues to evaluate the impact the CARES Act will have on the Company’s tax obligations, but has concluded it will not materially impact the Company’s income taxes for the three and six months ended April 30, 2020.

 

We use 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 we operate, to determine its 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) for income taxes was 1% and 23% of income before income taxes for the three months ended April 30, 2020 (the “fiscal 2020 quarter”) and 2019 (the “fiscal 2019 quarter”), respectively, and (7%) and 22% of income before income taxes for the six months ended April 30, 2020 and 2019, respectively. The change in the effective tax rate from the fiscal 2019 period to fiscal 2020 period was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to the Company’s forecasted book income in each period.

 

We had $118,000 and $80,000 of unrecognized tax benefits, inclusive of interest and penalties, as of April 30, 2020 and October 31, 2019, respectively. The unrecognized tax benefits, if recognized, would result in a net tax benefit of $30,000 as of April 30, 2020.

 

16

 

 

Note 11Intangible assets

 

Intangible assets consist of the following (in thousands): 

 

   

April 30, 2020

   

October 31, 2019

 

Amortizable intangible assets:

               

Non-compete agreement (estimated life 5 years)

  $ 423     $ 200  

Accumulated amortization

    (222 )     (200 )
      201       -  
                 

Customer relationships (estimated lives 7 - 15 years)

  $ 5,058     $ 2,879  

Accumulated amortization

    (2,126 )     (1,884 )
      2,932       995  
                 

Backlog (estimated life 1 - 2 years)

    287       134  

Accumulated amortization

    (200 )     (134 )
      87       -  
                 

Patents (estimated life 10 - 14 years)

    368       142  

Accumulated amortization

    (61 )     (45 )
      307       97  
                 

Totals

  $ 3,527     $ 1,092  
                 

Non-amortizable intangible assets:

               

Trademarks

  $ 1,174     $ 657  

 

Amortization expense for the six months ended April 30, 2020 and the year ended October 31, 2019 was $346,000 and $275,000, respectively. As of April 30, 2020, the weighted-average amortization period for the amortizable intangible assets is 8.39 years.

 

 

Note 12Commitments

 

We adopted ASU 2016-02 on November 1, 2019, and elected the practical expedient modified retrospective method whereby the lease qualification and classification was carried over from the accounting for leases under ASC 840. The lease contracts for the corporate headquarters, RF Connector division manufacturing facilities, Cables Unlimited, Rel-Tech, and C Enterprises commenced prior to the effective date of November 1, 2019, and were determined to be operating leases. All other new contracts have been assessed for the existence of a lease and for the proper classification into operating leases. The rate implicit in the leases was undeterminable, and therefore, the discount rate used in all lease contracts is our incremental borrowing rate.

 

We have operating leases for corporate offices, manufacturing facilities, and certain storage units. Our leases have remaining lease terms of 1 year to 3 years, some of which include options to extend the leases for up to 5 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, whom we make rent payments totaling $14,000 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 April 30, 2020 were as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

April 30, 2020

   

April 30, 2020

 

Operating lease cost

  $ 250     $ 504  

 

Other information related to leases was as follows (in thousands):

 

   

April 30, 2020

 

Supplemental Cash Flows Information

       

Right of use assets obtained in exchange for lease obligations:

       

Operating leases

  $ 1,904  
         

Weighted Average Remaining Lease Term

       

Operating leases (in months)

    30.31  
         

Weighted Average Discount Rate

       

Operating leases

    3.54 %

 

17

 

Future minimum lease payments under non-cancellable leases as of April 30, 2020 were as follows:

 

Year ended October 31,

 

Operating Leases

 
         

2020 (excluding six months ended April 30, 2020)

  $ 507  

2021

    919  

2022

    532  

2023

    166  

2024

    -  

Thereafter

    -  

Total future minimum lease payments

    2,124  

Less imputed interest

    (124 )

Total

  $ 2,000  

 

Reported as of April 30, 2020

 

Operating Leases

 

Other current liabilities

  $ 977  

Operating lease liabilities

    1,023  

Finance lease liabilities

    -  

Total

  $ 2,000  

 

As of April 30, 2020, operating lease ROU asset was $1.9 million and operating lease liability totaled $2.0 million, of which $977,000 is classified as current. There were no finance leases as of April 30, 2020.

 

 

Note 13 – Line of credit

 

In November 2019, we entered into an agreement for a revolving line of credit (“LOC”) in the amount of $5.0 million. Amounts outstanding under the LOC shall bear interest at a rate of 2.0% plus LIBOR Daily Floating Rate (“base interest rate”), with interest payable on the first day of each month. Borrowings under the LOC are secured by a security interest in certain assets of the Company. The LOC contains certain loan covenants. Failure to maintain the loan covenants may constitute an event of default, resulting in all outstanding amounts of principal and interest becoming immediately due and payable. All outstanding principal and interest is due and payable on December 1, 2021. As of April 30, 2020, we are in compliance with all loan covenants. Additionally, as of April 30, 2020, no amounts were outstanding under the line of credit.

 

 

Note 14 Cash dividend and declared dividends

 

During the three months ended April 30, 2020 and 2019, we paid dividends of $0.02 per share for a total of $195,000 and $187,000, respectively.  During the six months ended April 30, 2020 and 2019, we paid dividends of $0.02 per share for a total of $388,000 and $373,000, respectively.

 

 

Note 15 Subsequent event

 

On May 5, 2020, as part of the Paycheck Protection Program (“PPP”) of the CARES Act, we received PPP loans in the aggregate totaling approximately $2.8 million (“PPP Loan”).  The funds from the PPP Loan will be used to retain employees, maintain payroll and benefits, and make lease and utility payments during the eight-week period following the receipt of the loan, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act. To the extent not forgiven, the loan has a two-year term, a fixed interest rate of 1%, and principal and interest payments are deferred for six months. 

 

18

 

 

Item 2: Management’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’s 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 believes that the expectations reflected in the forward-looking statements are reasonable, the Company 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 is 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’s 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’s business, including without limitation the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Risk Factors,” and the audited consolidated financial statements and related notes included in the Company’s Annual Report filed on Form 10-K for the year ended October 31, 2019 and other reports and filings made with the Securities and Exchange Commission.

 

Critical Accounting Policies

 

Our unaudited condensed consolidated financial statements 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 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

 

We record allowance for doubtful accounts based upon our assessment of various factors. We consider historical experience, the age of the accounts receivable balance, credit quality of our customers, current economic conditions and other factors that may affect a customer’s ability to pay.

 

Long-Lived Assets Including Goodwill

 

We 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.

 

We amortize our intangible assets with definite useful lives over their estimated useful lives and review 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 requires 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.

 

19

 

Warranty Reserve

 

We recognize an accrued warranty liability for the estimated claims to remedy potential deficiencies of quality or performance of our products in the Schrofftech division within the Custom Cabling and Manufacturing Assembly segment. The product warranties extend over various periods, depending upon the product subject to the warranty. We record a provision for estimated future warranty claims based upon the historical relationship of warranty claims to sales, any specifically identified warranty issues and current trends and knowledge. We base our estimates in part on historical experience and on assumptions that are believed to be reasonable under the circumstances and revise our estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is reasonably possible that they may ultimately differ materially from actual results, including in the case of a significant product failure.

 

Earn-out liability

 

The purchase agreement for the acquisition of Schroff Technologies International, Inc. (“Schrofftech”) provides for an earn-out payment of up to $2,400,000, which amount is earned through October 31, 2022. The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure. 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 amount of the actual results and forecasted 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

 

We 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. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

 

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 our financial condition and operating results. 

 

Stock-based Compensation

 

We use the Black-Scholes model to value the stock option grants. This valuation is affected by our 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 coaxial and specialty cables and connectors, fiber optic cables and connectors, and electrical and electronic specialty cables and components. Through our manufacturing and production facilities, we provide a wide selection of interconnect products and solutions primarily to telecommunications carriers and equipment manufacturers, wireless and network infrastructure carriers and manufacturers and to various original equipment manufacturers (OEMs) in several market segments. Since the acquisition of Schrofftech in November 2019, we also manufacture and sell energy-efficient cooling systems and integrated small cell solutions and related components.

 

We operate through two reporting segments: (i) the RF Connector and Cable Assembly (“RF Connector”) segment, and (ii) the Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment. The RF Connector segment primarily designs, manufactures, markets and distributes a broad range of connector and cable products, including coaxial connectors and cable assemblies that are integrated with coaxial connectors, used in telecommunications and information technology OEM markets and other end markets. The Custom Cabling segment designs, manufactures, markets and distributes custom copper and fiber cable assemblies, complex hybrid fiber optic and power solution cables, electromechanical wiring harnesses, wiring harnesses for a broad range of applications in a diverse set of end markets, energy-efficient cooling systems for wireless base stations and remote equipment shelters and custom designed, pole-ready 5G small cell integrated enclosures. The two segments were determined based on the aggregation of operating divisions that have similar economic characteristics and are similar in the majority of 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.

 

For the six months ended April 30, 2020, most of our revenues were generated from the Custom Cabling segment from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which accounted for 69% of total sales. Revenues from the RF Connector segment were generated from the sales of RF connector products and cable assemblies and accounted for 31% of total sales for the six months ended April 30, 2020.

 

20

 

In March 2020, the World Health Organization (the “WHO”) declared coronavirus (COVID-19) a pandemic emergency. The COVID-19 pandemic has negatively impacted regional and global economies, disrupted global supply chains, and created significant volatility and disruption of financial markets. The global impact of the outbreak has been rapidly evolving and certain jurisdictions, including those where we have operations, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, social distancing protocols and restrictions on types of business that may continue to operate. While we have been deemed an “essential” business, and therefore have been permitted to continue our operations, the impact of the COVID-19 pandemic has affected both our operations and those of our customers. Our operations have been negatively affected by partial shutdowns of our facilities (particularly in the Northeast), by changes that we had to make on our operating methods and procedures, and by our reduced workforce as many of our employees stayed at home. Many of our customers and vendors have likewise had temporary closures of their facilities and have otherwise been impacted by changes in their industries. As a result, overall demand for our products has been reduced, and certain costs have increased. We have taken measures to protect the health and safety of our employees, and we continue to work with our customers and vendors to minimize potential disruptions in addressing the challenges posed by this global pandemic.

 

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by domestic and international jurisdictions to prevent disease spread, all of which are uncertain and cannot be predicted. The outbreak impacted our performance for the three and six months ended April 30, 2020. We currently expect the decline caused by the economic slowdown to persist through the remainder of 2020. The operations of our Cables Unlimited, Inc. subsidiary in Long Island, New York, was particularly affected as many employees stayed at home and as local customers shut down or otherwise delayed, deferred or cancelled orders for our products.  Because of the severe impact that COVID-19 has on our Northeastern operations, in May 2020 we applied for and received a $2.8 million of loans (the “PPP Loans”) under the Paycheck Protection Program of the CARES Act. The funds from the PPP Loans are being used to retain employees, maintain payroll and benefits, and make lease and utility payments. Without the PPP Loans, we would have made material reductions in our workforce (particularly at Cables Unlimited). We anticipate that most of the PPP Loans will be eligible for forgiveness in accordance with the provisions of the CARES Act.  To the extent not forgiven, the PPP Loans have a two-year term, a fixed interest rate of 1%, and principal and interest payments are deferred for six months.

 

We considered the impact of the COVID-19 related economic slowdown on our evaluation of goodwill impairment indicators as of April 30, 2020. Although no goodwill impairment indicators were identified, it is possible that impairments could emerge as the impact of the crisis becomes clearer and those losses could be material.

 

Liquidity and Capital Resources

 

Historically, we have been able to fund our liquidity and other capital requirements from funds we generated from operations. While we still believe that our existing current assets, the amount of cash we anticipate will be generated from on-going operations, and funds we received from the PPP Loans collectively will be sufficient to fund our anticipated liquidity and capital resource needs for at least twelve months from the date of this filing, there is some uncertainty because of the unknown future impact of COVID-19 pandemic on our business. Our existing assets and the cash expected to be generated from operations, including its current backlog of unfulfilled orders, will be sufficient during the current fiscal year based on the following:

 

As of April 30, 2020, we had a total of $14.1 million of cash and cash equivalents compared to a total of $12.5 million of cash and cash equivalents as of October 31, 2019. As of April 30, 2020, we had working capital of $23.5 million and a current ratio of approximately 5.1:1. Despite a decrease in sales as a result of the COVID-19 pandemic, our cash and cash equivalents increased from October 31, 2019 due to the timing of prior sales and the collection of outstanding accounts receivables, resulting in a decrease in the accounts receivable balance by $7.2 million, from $12.2 million as of October 31, 2019 to $5.0 million as of April 30, 2020. As of April 30, 2020, we had $29.2 million in current assets and $5.7 million in current liabilities. As mentioned above, since April 30, 2020 we have received $2.8 million in PPP Loans, which funds will provide us with additional liquidity.

 

As of April 30, 2020, we had $5.7 million of backlog, compared to $6.1 million as of October 31, 2019. Since purchase orders are submitted from customers based on the timing of their 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 purchase orders.

 

We generated cash of $1.5 million during the six months ended April 30, 2020 due largely to the collection of accounts receivables ($7.5 million) that was outstanding as of October 31, 2019. The cash collected from our accounts receivables and the increase in cash from noncash credits from depreciation and amortization ($0.5 million) and from stock-based compensation expense ($0.3 million) was partially offset by the net cash used in the purchase of Schrofftech ($3.9 million), net loss of $158,000, and a decrease in accounts payable ($1.1 million) and accrued expenses ($0.9 million) primarily due to the payout of prior year bonuses. In addition, during the six months ended April 30, 2020, we received $0.4 million from the exercise of stock options and paid out $0.4 million in dividends. The dividends were declared before the full impact of the COVID-19 pandemic was realized.

 

We do not anticipate needing material additional capital equipment in the next twelve months. In the past, we have financed some of our equipment and furnishings requirements through capital leases. No additional capital equipment purchases have been currently identified that would require significant additional leasing or capital expenditures during the next twelve months.

 

21

 

In November 2019, we entered into an agreement for a revolving line of credit (“LOC”) in the amount of $5.0 million. Amounts outstanding under the LOC shall bear interest at a rate of 2.0% plus LIBOR Daily Floating Rate (“base interest rate”), with interest payable on the first day of each month. Borrowings under the LOC are secured by a security interest in certain assets of the Company. The LOC contains certain loan covenants. Failure to maintain the loan covenants may constitute an event of default, which could result in all outstanding amounts of principal and interest becoming immediately due and payable. All outstanding principal and interest is due and payable on December 1, 2021. As of April 30, 2020, we were in compliance with all loan covenants. Additionally, as of the date of this report, we have not used the LOC and accordingly, the entire amount of the LOC is currently available.

 

From time to time, we may undertake acquisitions of other companies or product lines in order to diversify our product and solutions offerings and customer base. Conversely, 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 outlay of cash, which may reduce our liquidity and capital resources while dispositions may increase our cash position, liquidity and capital resources. On November 4, 2019, we purchased the business of Schroff Technologies International, Inc., a Rhode Island-based manufacturer and marketer of intelligent thermal control systems used by telecommunications companies across the U.S. and Canada, and shrouds for small cell integration and installation. At the closing, in consideration for Schrofftech, we paid the sellers $4 million in cash, and, if certain financial targets are met by Schrofftech over a two-year period, agreed to pay an additional cash earn-out payment of up to $2.4 million.

 

Results of Operations

 

Three Months Ended April 30, 2020 vs. Three Months Ended April 30, 2019

 

Net sales of $10.4 million decreased by 24%, or $3.2 million, for the three months ended April 30, 2020 (the “fiscal 2020 quarter”) compared to the three months ended April 30, 2019 (the “fiscal 2019 quarter”). Net sales for the fiscal 2020 quarter at the Custom Cabling segment decreased by $3.7 million, or 36%, to $6.6 million, compared to $10.3 million in the fiscal 2019 quarter. The decrease was primarily in our project-based business resulting from the slowdown in carrier spending. This decrease was partially offset by additional sales contributed by the newly acquired Schrofftech and C Enterprises, Inc. subsidiaries (we did not own Schrofftech in the fiscal 2019 quarter, and only owned C Enterprises for six weeks in the 2019 quarter). Net sales for the fiscal 2020 quarter at the RF Connector segment increased by $0.5 million, or 15%, to $3.8 million as compared to $3.3 million in the fiscal 2019 quarter.

 

Gross profit for the fiscal 2020 quarter decreased by $1.5 million to $2.6 million and gross margins decreased to 24.9% of sales from 30.0% of sales in the fiscal 2019 quarter. The decrease in gross profit and gross margins was primarily due to lower sales in the project-based business that resulted in lower coverage of fixed production costs, product mix at the Custom Cabling segment, and increased sales at the C Enterprises subsidiary, whose gross margins are lower than the blended margin of our other divisions.

 

Engineering expenses increased $0.2 million to $0.5 million for the fiscal 2020 quarter compared to $0.3 million in the fiscal 2019 quarter primarily due to the absorption of the engineering costs of the newly acquired Schrofftech, a company that we did not own in fiscal 2019, and the expenses for a full quarter of C Enterprises, a company that we acquired on March 15, 2019. Engineering expenses represent costs incurred relating to the ongoing research and development of new products.

 

Selling and general expenses decreased $0.2 million to $2.2 million (22% of sales) compared to $2.4 million (18% of sales) in the second quarter last year primarily due to the decrease in valuation of Schrofftech’s earn-out liability, partially offset with (i) the selling and general expenses of the Schrofftech subsidiary and (ii) a full quarter of selling and general expenses of the C Enterprises subsidiary (last year, we only owned C Enterprises for part of the fiscal quarter). Additionally, total selling and general expenses in the current quarter included $0.2 million of amortization expense, an increase of $0.1 million over last year as a result of the acquisition of Schrofftech, and $0.1 million in stock-based compensation expense.

 

For the fiscal 2020 quarter, pretax income (loss) for the Custom Cabling segment and the RF Connector segment was $(0.9) million and $0.7 million, respectively, as compared to $1.1 million and $0.3 million for the comparable second quarter last year. The pretax loss at the Custom Cabling segment in the second quarter of fiscal 2020 was primarily due to the lower sales in the project-based business resulting from the slowdown in carrier spending.

 

The provision for income taxes was 1% and 23% of income before income taxes for the fiscal 2020 quarter and the fiscal 2019 quarter, respectively. The change in the effective tax rate from the fiscal 2019 quarter to fiscal 2020 quarter was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to the Company’s forecasted book income in each period.

 

For the fiscal 2020 quarter, net loss was $0.2 million and fully diluted loss per share was $0.02 per share as compared to a net income of $1.1 million and fully diluted earnings per share of $0.11 per share for the fiscal 2019 quarter. For the fiscal 2020 quarter, the diluted weighted average shares outstanding was 9,704,880 as compared to 9,837,964 for the fiscal 2019 quarter.

 

Six Months Ended April 30, 2020 vs. Six Months Ended April 30, 2019

 

Net sales of $22.8 million decreased by 6%, or $1.5 million, for the six months ended April 30, 2020 (the “fiscal 2020 six-month period”) compared to the six months ended April 30, 2019 (the “fiscal 2019 six-month period”). The decrease in net sales is attributable to a decrease in net sales at the Custom Cabling segment, which decreased by $1.8 million, or 10%, to $15.8 million compared to $17.7 million in the fiscal 2019 six-month period. The decrease was primarily in our project-based business which resulted from the slowdown in carrier spending. This decrease was partially offset by increased sales from the newly acquired Schrofftech and C Enterprises. Net sales for the fiscal 2020 six-month period at the RF Connector segment increased by $0.4 million, or 5%, to $7.0 million compared to $6.6 million in the fiscal 2019 six-month period.

 

22

 

Gross profit for the fiscal 2020 six-month period decreased by $1.4 million to $5.8 million and gross margins decreased to 25.6% of sales from 29.8% of sales in the fiscal 2019 six-month period. The decrease in gross profit and gross margins was primarily due to lower sales in the project-based business that resulted in lower coverage of fixed production costs, product mix at the Custom Cabling segment, and increased sales at the C Enterprises subsidiary, whose gross margins are lower than the blended margins of our other divisions.

 

Engineering expenses increased $0.4 million to $1.1 million for the fiscal 2020 six-month period compared to $0.7 million in the fiscal 2019 six-month period primarily due to the absorption of the engineering costs of the newly acquired Schrofftech, which we did not own in fiscal 2019, and a full six months of engineering costs at C Enterprises (whose expenses were only included in 2019 for the six-week period following the acquisition of this subsidiary on March 15, 2019). Engineering expenses represent costs incurred relating to the ongoing research and development of new products.

 

Selling and general expenses increased $0.5 million to $4.9 million (22% of sales) compared to $4.4 million (18% of sales) in the six-month period last year largely due to the absorption of the additional selling and general expenses of the Schrofftech and C Enterprises subsidiaries. Additionally, total selling and general expenses in the current quarter included $0.3 million of amortization expense, an increase of $0.2 million over last year as a result of the acquisition of Schrofftech, and $0.3 million in stock-based compensation expense, an increase of $0.1 million over last year due in part to a new officer hired by the Company. These costs were partially offset with a $0.3 million valuation decrease in the Schrofftech earn-out liability.

 

For the fiscal 2020 six-month period, pretax income (loss) for the Custom Cabling segment and the RF Connector segment was $(1.2) million and $1.0 million, respectively, as compared to $1.6 million and $0.5 million for the comparable six-month period last year. The pretax loss at the Custom Cabling segment in the six-month period of fiscal 2020 was primarily due to the decrease in project-based businesses resulting from the slowdown in carrier spending.

 

The provision (benefit) for income taxes was (7%) and 22% of income before income taxes for the six months ended April 30, 2020 and 2019, respectively. The change in the effective tax rate from the fiscal 2019 six-month period to fiscal 2020 six-month period was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to the Company’s forecasted book income in each period.

 

For the fiscal 2020 six-month period, net loss was $0.2 million and fully diluted loss per share was $0.02 per share as compared to a net income of $1.7 million and fully diluted earnings per share of $0.17 per share for the fiscal 2019 six-month period. For the fiscal 2020 six-month period, the diluted weighted average shares outstanding was 9,633,935 as compared to 9,837,718 for the fiscal 2019 six-month period.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Nothing to report.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We 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, we 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 we necessarily are required to apply our judgment in weighting 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 required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report, we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, we concluded that our disclosure controls and procedures were effective as of that date.

 

As described throughout our quarterly report, during the quarter ended January 31, 2020, we acquired Schrofftech, 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.

 

Other than as described above, there has been no changes in our internal control over financial reporting during the quarter ended April 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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 discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 filed with the SEC, which describe various risks and uncertainties to which we are or may become subject. Further, the current coronavirus (“COVID-19”) pandemic and actions taken to address the pandemic may exacerbate the risks described in our SEC reports. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

 

The COVID-19 pandemic has adversely impacted, and poses risks to, our business, the nature and extent of which are highly uncertain and unpredictable. In March 2020, the WHO characterized COVID-19 as a pandemic. This pandemic has resulted in a global health crisis that is adversely affecting broader economies, financial markets, and the business environment worldwide. We are monitoring the global impact of the COVID-19 pandemic and taking steps to mitigate the accompanying impact on our business by working with our employees, customers, suppliers, and other stakeholders. The pandemic is adversely affecting, and is expected to continue to adversely affect, certain elements of our business. Portions of our workforce may be unable to work effectively due to illness and containment measures, including quarantines, illness precautions, travel restrictions, and other restrictions. We experienced volatility in customer demand as their businesses were impacted by the pandemic. If the pandemic continues and conditions worsen, we may experience additional adverse impacts on our operational and commercial activities, including rising costs, volatility in customer orders and purchases and declines in our collections of accounts receivable. Furthermore, the pandemic has impacted and may further impact the broader U.S. economy, including negatively impacting economic growth, the proper functioning of financial and capital markets and interest rates, all of which could lead to a decline in our net sales. Due to the speed with which the situation is developing, the breadth of its spread and the range of governmental and community reactions thereto, there is uncertainty around its duration, ultimate impact and the timing of recovery. Therefore, the pandemic could lead to an extended disruption of economic activity and the impact on our stock price, access to capital, consolidated results of operations, financial position and cash flows could be material.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Nothing to report.

 

Item 3. Defaults upon Senior Securities

 

Nothing to report.

 

Item 4. Mine Safety Disclosures

 

Nothing to report.

 

Item 5. Other Information

 

Nothing to report.

 

Item 6. Exhibits

 

Exhibit

Number

 

   

31.1:

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2:

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32.1:

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2:

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

   
   

101.INS

XBRL Instance Document.

   

101.SCH

XBRL Taxonomy Schema.

   

101.CAL

XBRL Taxonomy Extension Calculation Linkbase.

   

101.DEF

XBRL Taxonomy Extension Definition Linkbase.

   

101.LAB

XBRL Taxonomy Extension Label Linkbase.

   

101.PRE

XBRL Taxonomy Extension Presentation Linkbase.

 

24

 

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: June 11, 2020

By:  

/s/ Robert Dawson

 

 

Robert Dawson

President and Chief Executive Officer

(Principal Executive Officer)

 

 

Date: June 11, 2020

By:

/s/ Mark Turfler

 

 

Mark Turfler

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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