NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 - Unaudited interim condensed consolidated financial
statements
The 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, 2015 has been derived from, and certain
terms used herein are defined in, the audited consolidated financial statements of the Company as of October 31, 2015 included
in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2015 that was previously
filed with the Securities and Exchange Commission (“SEC”). Operating results for the three- and six-month periods ended
April 30, 2016 are not necessarily indicative of the results that may be expected for the year ending October 31, 2016. The unaudited
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2015.
Principles of consolidation
The accompanying unaudited condensed consolidated
financial statements for the periods ending on or before October 31, 2015 include the accounts of RF Industries, Ltd., Cables Unlimited,
Inc. (“Cables Unlimited”), Comnet Telecom Supply, Inc. (“Comnet”), a wholly-owned subsidiary that RF Industries,
Ltd. acquired effective November 1, 2014, and Rel-Tech Electronics, Inc. (“Rel-Tech”), a wholly-owned subsidiary that
RF Industries, Ltd. acquired effective June 1, 2015. The unaudited condensed consolidated financial statements for the three- and
six-months ended April 30, 2016 include the accounts of RF Industries, Ltd., Cables Unlimited, Comnet and Rel-Tech. For periods
ending on or before January 31, 2015, references herein to the “Company” shall refer to RF Industries, Ltd., Cables
Unlimited and Comnet, and for all periods after October 31, 2015, references to the “Company” shall refer to RF Industries,
Ltd., Cables Unlimited, Comnet and Rel-Tech, collectively. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts
in the prior period condensed consolidated financial statements have been reclassified to conform to the current period
presentation. These reclassifications had no effect on reported consolidated net income.
Revenue recognition
Four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
is fixed and determinable; and (4) collectability is reasonably assured. The Company recognizes revenue from product sales after
purchase orders are received which contain a fixed price and the products are shipped. Most of the Company’s products are
sold to continuing customers with established credit histories.
Note 2 - Business acquisitions
Rel-Tech Electronics, Inc.
On June 5, 2015, the Company purchased 100%
of the issued and outstanding shares of Rel-Tech pursuant to a Stock Purchase Agreement. Rel-Tech was wholly-owned by Wilfred D.
LeBlanc Jr., Ralph Palumbo and their respective wives. Rel-Tech is a Milford, Connecticut based manufacturer and supplier of custom
cable assemblies and wiring harnesses. At the closing, RF Industries, Ltd. paid the sellers $3,100,000, which consisted of $2,100,000
in cash and 50,467 shares of the Company’s unregistered common stock valued at $200,000 based on a per share price of $3.96
(the volume weighted average price of the Company’s common stock during the five trading days before the closing date) and,
if certain financial targets are met by Rel-Tech over a three-year period, agreed to pay additional cash earn-out payments of up
to $800,000. Rel-Tech will operate as a stand-alone subsidiary for at least the next two years. Mr. Palumbo will serve as President
of Rel-Tech at a base salary of $150,000 per year. Mr. Palumbo will also be entitled to earn an annual bonus of up to 50% of his
base salary. Rel-Tech has also entered into employment agreements to retain five key managers.
The acquisition was accounted for in accordance
with the acquisition method of accounting. The acquired assets and assumed liabilities were recorded by the Company at their estimated
fair values. The Company determined the estimated fair values with the assistance of appraisals or valuations performed by an independent
third party specialist. Rel-Tech offers a full range of value-added services including product design, prototyping, stocking, bill
of materials management, consignment and fulfillment programs. Rel-Tech provides engineered solutions to many leasing OEMs and
markets its products to customers in commercial as well as military arenas. All assembly is performed at the Rel-Tech’s facilities.
These products and services supplement and enhance the existing markets of RF Industries without incurring substantially more costs
than incurred in the purchase of Rel-Tech. These factors, among others, contributed to a purchase price in excess of the estimated
fair value of Rel-Tech’s net identifiable assets acquired and, as a result, we have recorded goodwill in connection with
this acquisition. We do not expect the goodwill recorded to be deductible for income tax purposes.
Although the closing occurred on June 5,
2015, the acquisition of Rel-Tech is deemed to have become effective for financial accounting purposes as of June 1, 2015. Accordingly
Rel-Tech’s financial results have been included in the results of the Custom Cabling Manufacturing and Assembly segment since
June 1, 2015.
The following
table summarizes the components of the estimated purchase price at fair value at June 1, 2015:
Cash consideration paid
|
|
$
|
2,100,000
|
|
RF Industries, Ltd. common shares issued (50,467 shares)
|
|
|
200,000
|
|
Earn-out
|
|
|
610,000
|
|
Total purchase price
|
|
$
|
2,910,000
|
|
The following
table summarizes the final allocation of the estimated purchase price at fair value at June 1, 2015:
Current assets
|
|
$
|
1,637,000
|
|
Fixed assets
|
|
|
68,000
|
|
Other assets
|
|
|
17,000
|
|
Intangible assets
|
|
|
1,425,000
|
|
Goodwill
|
|
|
833,000
|
|
Deferred tax liabilities
|
|
|
(489,000
|
)
|
Non-interest bearing liabilities
|
|
|
(581,000
|
)
|
Net assets
|
|
$
|
2,910,000
|
|
The results of
Rel-Tech’s operations subsequent to June 1, 2015 have been included in the Company’s condensed consolidated results
of operations. All costs related to the acquisition of Rel-Tech have been expensed as incurred. For the three- and six-months ended
April 30, 2016, Rel-Tech contributed $1.8 million and $3.3 million of revenue, respectively.
The Company recognized
a $120,000 charge to selling, general and administrative expenses as a result of the revaluation of the earn-out liability as it
relates to the acquisition of Rel-Tech for the three months ended April 30, 2016. As of April 30, 2016, the Company has accrued
$730,000 in earn-out accrual, of which $353,000 is in current liabilities and $377,000 is in long-term liabilities.
The following unaudited pro forma financial
information presents the combined operating results of the Company and Rel-Tech as if the acquisition 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.
Pro forma financial information is presented
in the following table:
|
|
Three Months Ended April 30,
|
|
|
Six Months Ended April 30,
|
|
|
|
2015
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
9,279,000
|
|
|
$
|
17,170,000
|
|
Net income
|
|
|
471,000
|
|
|
|
545,000
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
CompPro Product Line
On May 19, 2015, the Company purchased the
CompPro braided product line (“CompPro”), including the intellectual property rights to that product line, for a total
purchase price of $700,000 cash. CompPro utilizes a patented compression technology that offers revolutionary advantages for a
water-tight connection, easier installation, and improved system reliability on braided cables. CompPro is used by wireless network
operators, installers and distributors in North America and other parts of the world. Included in the purchase is inventory, designs,
intellectual property rights and the rights to manufacture and sell CompPro products. Financial results for sales of the CompPro
products are included in the results of the RF Connector and Cable Assembly segment beginning in the Company’s fiscal quarter
ended October 31, 2015.
The acquisition was accounted for in accordance
with the acquisition method of accounting. The acquired assets were recorded by the Company at their estimated fair values. The
Company determined the estimated fair values with the assistance of appraisals or valuations performed by an independent third
party specialist. These above factors, among others, contributed to a purchase price in excess of the estimated fair value of CompPro’s
net identifiable assets acquired and, as a result, the Company recorded goodwill in connection with this transaction.
Goodwill acquired
was allocated to the Company’s Connector and Cable Assembly segment as part of the purchase price allocation. The Company
expects the goodwill recorded to be deductible for income tax purposes. Acquired amortizable intangible assets are being amortized
on a straight-line basis over their estimated useful lives ranging from three to seven years.
The following
table summarizes the components of the estimated purchase price at fair value at May 19, 2015:
Cash consideration paid
|
|
$
|
700,000
|
|
Total purchase price
|
|
$
|
700,000
|
|
The following
table summarizes the final allocation of the estimated purchase price at fair value at May 19, 2015:
Current assets
|
|
$
|
186,300
|
|
Fixed assets
|
|
|
67,500
|
|
Intangible assets
|
|
|
321,200
|
|
Goodwill
|
|
|
125,000
|
|
Net assets
|
|
$
|
700,000
|
|
The results of
CompPro’s sales subsequent to May 19, 2015 have been included in the Company’s consolidated results of operations.
All costs related to the acquisition of CompPro have been expensed as incurred.
Comnet Telecom Supply, Inc.
The Company purchased 100% of the issued
and outstanding shares of Comnet from Robert Portera, the sole shareholder of Comnet. Comnet is a New Jersey based manufacturer
and supplier of telecommunications and data products, including fiber optic cables, cabling technologies, custom patch cord assemblies,
data center consoles and other data center equipment. Comnet is a New York corporation that was formed in 1993. For income tax
purposes, both parties have agreed to make an election under Internal Revenue Code 338(h) (10). At the closing, RF Industries,
Ltd. paid Mr. Portera $4,150,000 in cash and stock, and agreed to pay him up to an additional $1,360,000 in cash as an earn-out
over the next two years if Comnet meets certain financial milestones. The purchase price paid at the closing consisted of $3,090,000
in cash (of which $300,000 was deposited into a bank escrow account for one year, which has since been subsequently released, as
security for the seller’s indemnification obligations under the stock purchase agreement) and 252,381 shares of RF Industries,
Ltd.’s unregistered common stock, which shares were valued at $1,060,000 based on a per share price of $4.20 (the volume
weighted average price of the common stock during the five trading days before the closing date). Comnet will be operated as a
stand-alone subsidiary for at least the next two years from the date of acquisition. The Company entered into a two-year employment
agreement with Mr. Portera pursuant to which Mr. Portera will be the President of Comnet and receive a base salary of $210,000
per year. Mr. Portera will also be entitled to earn an annual bonus of up to 50% of his base salary. Since the acquisition of Comnet
was effective for financial accounting purposes as of November 1, 2014 with an effective closing date of January 20, 2015, Comnet’s
financial results have been included in the results of the Custom Cabling Manufacturing and Assembly segment since November 1,
2014.
The acquisition was accounted for in accordance
with the acquisition method of accounting. The acquired assets and assumed liabilities were recorded by the Company at their estimated
fair values. The Company determined the estimated fair values with the assistance of appraisals or valuations performed by an independent
third party specialist. The products manufactured and supplied by Comnet include fiber optic cables, cabling technologies, custom
patch cord assemblies, data center consoles and other data center equipment. These products supplement and enhance the existing
markets of RF Industries as well as tap into new data center markets that the Company would not have been able to enter without
incurring substantially more costs than incurred in the purchase of Comnet. The capital and other resources required to enhance
the Company’s fiber optics market and enter the data center market would have greatly exceeded the purchase price of $4.15
million (excluding the potential earn-out). These factors, among others, contributed to a purchase price in excess of the estimated
fair value of Comnet’s net identifiable assets acquired and, as a result, the Company recorded goodwill in connection with
this transaction.
Goodwill acquired
was allocated to the Company’s operating segment and Comnet reporting unit as part of the purchase price allocation. The
Company expects the goodwill recorded to be deductible for income tax purposes. Acquired amortizable intangible assets are being
amortized on a straight-line basis over their estimated useful lives ranging from three to eight years.
The following
table summarizes the components of the estimated purchase price at fair value at November 1, 2014:
Cash consideration paid
|
|
$
|
3,090,000
|
|
RF Industries, Ltd. common shares issued (252,381 shares)
|
|
|
1,060,000
|
|
Earn-out
|
|
|
1,235,000
|
|
Total purchase price
|
|
$
|
5,385,000
|
|
The following
table summarizes the final allocation of the purchase price at fair value at November 1, 2014:
Current assets
|
|
$
|
1,875,000
|
|
Fixed assets
|
|
|
150,000
|
|
Intangible assets
|
|
|
2,910,000
|
|
Goodwill
|
|
|
1,879,000
|
|
Non-interest bearing liabilities
|
|
|
(1,429,000
|
)
|
Net assets
|
|
$
|
5,385,000
|
|
The results of
Comnet’s operations subsequent to November 1, 2014 have been included in the Company’s consolidated results of operations.
All costs related to the acquisition of Comnet have been expensed as incurred. For the three and six months ended April 30, 2016,
Comnet contributed $2.4 million and $4.6 million of revenue, respectively.
The Company recognized
a $200,000 and $318,000 credit to selling, general and administrative expenses as a result of the revaluation of the earn-out liability
as it relates to the acquisition of Comnet for the three months ended April 30, 2016 and for the three months ended October 31,
2015. As of April 30, 2016, the Company has accrued $241,000 in earn-out accrual, all of which is in current liabilities.
Note 3 - Discontinued operations
During 2013, the Company sold its RF Neulink
and RadioMobile divisions, which together had comprised the Company’s RF Wireless segment. The divisions were sold pursuant
to asset purchase agreements, whereby no purchase price was paid at the closing. Rather, the agreements stipulated royalty payments
from each of the purchasers over a three-year period. For the three and six months ended April 30, 2016, the Company recognized
approximately $200 and $1,800 of royalty income for RF Neulink, which amount has been included within discontinued operations.
For the three and six months ended April 30, 2015, the Company recognized approximately $1,000 and $22,000 of royalty income for
the RF Neulink and RadioMobile divisions, respectively, which amounts have been included within discontinued operations.
During March 2016, the Company announced
the shutdown of its Bioconnect division, which comprised the entire operations of the Medical Cabling and Interconnect segment.
The closure is part of the Company’s ongoing plan to close or dispose of underperforming divisions that are not part of the
Company’s core operations. For the three and six months ended April 30, 2016, the Company recognized approximately $59,000 and
$99,000 of loss, net of tax, for the Bioconnect division, respectively, which amounts have been included within discontinued operations.
Included in the fiscal 2016 quarter loss, the Company recognized a $173,000 pretax write-down on Bioconnect division’s inventory.
For the three and six months ended April 30, 2015, the Company recognized approximately $84,000 and $194,000 of income, net
of tax, for the Bioconnect division, respectively, which amounts have been included within discontinued operations.
Note 4 - Sale of Aviel Electronics division
On December 22, 2015, the Company sold the
assets of its Aviel Electronics division at a gain of approximately $35,000. The terms of the sale included $150,000 cash due upon
closing and a $250,000 secured promissory note ($83,000 recorded in other current assets and $139,000 in other assets) with principal
and interest (at 5%) payable over a three-year period. Aviel Electronics’ sales and loss from continuing operations before
provision for income taxes of $86,000 and $40,000, respectively, were included in the Company’s RF Connector and Cable Assembly
segment from November 1, 2015 through the date of sale on December 22, 2015. Aviel Electronics’ sales and income from continuing
operations before provision for income taxes were $293,000 and $80,000, respectively, for the three months ended April 30, 2015
and $545,000 and $106,000, respectively, for the six months ended April 30, 2015.
The sale of the Aviel Electronics division
does not represent a strategic shift that has a major effect on the Company’s operations and financial results. Accordingly,
historical results and the sale of Aviel Electronics will be reported in income from continuing operations.
Note 5 - Inventories and major vendors
Inventories are stated at the lower of cost
or market, with cost determined using the weighted average cost of accounting. Cost includes materials, labor, and manufacturing
overhead related to the purchase and production of inventories. We regularly review inventory quantities on hand, future purchase
commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below
carrying value due to damage, physical deterioration, obsolescence, changes in price levels, or other causes, we reduce our inventory
to a new cost basis through a charge to cost of sales in the period in which it occurs. The determination of market value and the
estimated volume of demand used in the lower of cost or market analysis require significant judgment.
In June 2015, the Company acquired Rel-Tech,
a company that currently values its inventories using specific identification (last purchase price) on a FIFO basis. The Company
intends to convert the inventory valuation principles used by Rel-Tech to the weighted average cost sometime during fiscal 2016.
Inventories consist of the following (in thousands):
|
|
April 30, 2016
|
|
|
October 31, 2015
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
3,059
|
|
|
$
|
2,671
|
|
Work in process
|
|
|
271
|
|
|
|
270
|
|
Finished goods
|
|
|
3,480
|
|
|
|
3,987
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,810
|
|
|
$
|
6,928
|
|
Purchases
of inventory from two major vendors during the six months ended April 30, 2016 represented 10%, and 7% of total inventory purchases
compared to 13% and 11% of total inventory purchases for the same period in 2015. The Company has arrangements with these vendors
to purchase product based on purchase orders periodically issued by the Company.
Note 6 - Other current assets
Other current assets consist of the following
(in thousands):
|
|
April 30, 2016
|
|
|
October 31, 2015
|
|
|
|
|
|
|
|
|
Prepaid taxes
|
|
$
|
619
|
|
|
$
|
408
|
|
Prepaid expense
|
|
|
649
|
|
|
|
140
|
|
Notes receivable, current portion
|
|
|
83
|
|
|
|
-
|
|
Other
|
|
|
61
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,412
|
|
|
$
|
728
|
|
Long-term portion
of notes receivable of $139,000 is recorded in other assets.
Note 7 - Earnings 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 per share is computed by dividing net income 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 dilutive securities totaling 1,111,134 and 624,209 for
the three months ended April 30, 2016 and 2015, respectively, and 1,120,6653 and 624,609 for the six months ended April 30, 2016
and 2015, 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,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
8,759,570
|
|
|
|
8,509,970
|
|
|
|
8,738,012
|
|
|
|
8,395,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add effects of potentially dilutive securities-assumed
exercise of stock options
|
|
|
-
|
|
|
|
373,212
|
|
|
|
-
|
|
|
|
377,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings per share
|
|
|
8,759,570
|
|
|
|
8,883,182
|
|
|
|
8,738,012
|
|
|
|
8,773,667
|
|
Note 8 - Stock-based compensation and equity transactions
The
Company’s current stock incentive plan provides for the granting of qualified and nonqualified options to the Company’s
officers, directors and employees. Incentive stock options granted to the Company’s employees during the six months ended
April 30, 2015 vest and are exercisable equally over three years and expire in five years from date of grant. During the three
and six months ended April 30, 2015, the Company granted a total of zero and 127,558 incentive stock options, respectively, to
Company employees. The Company satisfies the exercise of options by issuing previously unissued common shares.
No
options were granted to Company employees during the three and six months ended April 30, 2016.
The
weighted average fair value of employee and non-employee directors’ stock options granted by the Company during the six
months ended April 30, 2016 and 2015 was estimated to be $0.63 and $1.00 per share, respectively, using the Black-Scholes
option pricing model with the following assumptions:
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
|
0.56
|
%
|
|
|
0.89
|
%
|
Dividend yield
|
|
|
2.23
|
%
|
|
|
6.38
|
%
|
Expected life of the option
|
|
|
2.1 years
|
|
|
|
3.5 years
|
|
Volatility factor
|
|
|
25.3
|
%
|
|
|
47.3
|
%
|
Expected volatilities
are based on historical volatility of the Company’s stock price and other factors. The Company used the historical method
to calculate the expected life of the 2015 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.
Issuances of common stock by the
Company
During the six months ended April 30, 2015,
the Company issued 252,381 shares of common stock valued at approximately $1,060,000 to the former owner of Comnet as part of the
purchase price of the Comnet acquisition. The Comnet acquisition is more fully described in Note 2 of this report.
Company stock option plans
Descriptions of the
Company’s stock option plans are included in Note 8 of the Company’s Annual Report on Form 10-K for the year ended
October 31, 2015. A summary of the status of the options granted under the Company’s stock option plans as of April 30, 2016
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, 2015
|
|
|
1,240,100
|
|
|
$
|
3.64
|
|
Options granted
|
|
|
84,936
|
|
|
$
|
3.58
|
|
Options exercised
|
|
|
(180,067
|
)
|
|
$
|
0.27
|
|
Options canceled or expired
|
|
|
(37,320
|
)
|
|
$
|
4.29
|
|
Options outstanding at April 30, 2016
|
|
|
1,107,649
|
|
|
$
|
4.17
|
|
Options exercisable at April 30, 2016
|
|
|
620,469
|
|
|
$
|
3.89
|
|
Options vested and expected to vest at April 30, 2016
|
|
|
1,101,580
|
|
|
$
|
4.16
|
|
Weighted average remaining contractual life of options outstanding
as of April 30, 2016: 5.09 years
Weighted average remaining contractual life of options exercisable
as of April 30, 2016: 3.4 years
Weighted average remaining contractual life of options vested
and expected to vest as of April 30, 2016: 5.09 years
Aggregate intrinsic value of options outstanding at April 30,
2016: $0.2 million
Aggregate intrinsic value of options exercisable at April 30,
2016: $0.2 million
Aggregate intrinsic value of options vested and expected to
vest at April 30, 2016: $0.2 million
As of April 30, 2016,
$602,000 of expense with respect to nonvested share-based arrangements has yet to be recognized and is expected to be recognized
over a weighted average period of 5.2 years.
Non-employee directors receive $30,000 annually,
which amount is paid one-half in cash and one-half through the grant of non-qualified stock options to purchase shares of the Company’s
common stock. During the quarter ended January 31, 2016, the Company granted each of its then three non-employee directors 51,192
options. The number of stock options granted to each director was determined by dividing $15,000 by the fair value of a stock option
grant using the Black-Scholes model ($0.87 per share). These options vest ratably over fiscal year 2016.
On April 6, 2016, Howard Hill, the Company’s
Chief Operating Officer, retired from the Company. On becoming non-employee member of the Board on April 7, 2016, Mr. Hill was
granted 33,744 options, representing the director compensation payable to him for his services for the remainder of the current
year. The number of stock options granted was determined by dividing his pro-rata portion of his stock-based compensation for serving
on the Board of $8,750 by the fair value of a stock option grant using the Black-Scholes model ($0.26). These options vest ratably
over fiscal 2016.
Stock option expense
During the six months
ended April 30, 2016 and 2015, stock-based compensation expense totaled $102,000 and $101,000, respectively. During the three months
ended April 30, 2016 and 2015, stock-based compensation expense totaled $51,000 and $51,000, respectively. For the six months ended
April 30, 2016 and 2015, stock-based compensation classified in cost of sales amounted to $17,000 and $29,000, respectively, and
stock-based compensation classified in selling and general expense amounted to $85,000 and $72,000, respectively.
Note 9 - Concentrations of credit risk
Financial instruments
which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. At April 30, 2016,
the Company had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $4.2 million.
One customer accounted
for approximately 15% and 25% of the Company’s net sales for the six-month period ended April 30, 2016 and 2015, respectively.
This same customer accounted for approximately 15% and 22% of the Company’s net sales for the three months ended April 30,
2016 and 2015, respectively. At April 30, 2016 and October 31, 2015, this customers’ accounts receivable balance accounted
for approximately 16% and 17% of the Company’s total net accounts receivable balances. Although this customer has been an
ongoing major customer of the Company continuously during the past 15 years, the written agreements with this customer do not have
any minimum purchase obligations and the customer could stop buying the Company’s products at any time and for any reason.
A reduction, delay or cancellation of orders from this customer or the loss of this customer could significantly reduce the Company’s
future revenues and profits.
Note 10 - Segment information
The Company aggregates operating divisions
into operating segments which 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. As of April
30, 2016, the Company had two segments based upon this evaluation - RF Connector and Cable Assembly and Custom Cabling Manufacturing.
The Company has decided to close the Medical Cabling and Interconnect segment in March 2016.
During the fiscal quarter ended April 30,
2016, the RF Connector and Cable Assembly segment consisted of two divisions and the Custom Cabling Manufacturing and Assembly
segment was composed of three divisions. The four divisions that meet the quantitative thresholds for segment reporting are
Connector and Cable Assembly, Cables Unlimited, Comnet and Rel-Tech. The other division aggregated into the RF Connector and Cable
Assembly segment and into the Custom Cabling Manufacturing and Assembly segment has similar products that are marketed to their
respective customer base and production and product development processes that are similar in nature. The specific customers
are different for each division; however, there is some overlapping of product sales to them. The methods used to distribute products
are similar within each division aggregated.
Management identifies the Company’s
segments based on strategic business units that are, in turn, based along market lines. These strategic business units offer products
and services to different markets in accordance with their customer base and product usage. For segment reporting purposes, the
Company aggregated the Connector and Cable Assembly and Aviel (until the time of sale) divisions into the RF Connector and Cable
Assembly segment, and the Cables Unlimited, Comnet and Rel-Tech division constituted the Custom Cabling Manufacturing and segment.
As reviewed by the Company’s chief
operating decision maker, the Company evaluates the performance of each segment based on income or loss before income taxes. The
Company charges depreciation and amortization directly to each division within the segment. Accounts receivable, inventory, property
and equipment, 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
the Company’s operations are conducted in the United States; however, the Company derives a portion of its revenue from export
sales. The Company attributes sales to geographic areas based on the location of the customers. The following table presents the
sales of the Company by geographic area for the three and six months ended April 30, 2016 and 2015 (in thousands):
|
|
Three Months Ended April 30,
|
|
|
Six Months Ended April 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,603
|
|
|
$
|
7,235
|
|
|
$
|
14,095
|
|
|
$
|
13,254
|
|
Foreign countries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
75
|
|
|
|
112
|
|
|
|
146
|
|
|
|
226
|
|
Israel
|
|
|
-
|
|
|
|
135
|
|
|
|
62
|
|
|
|
188
|
|
Mexico
|
|
|
52
|
|
|
|
95
|
|
|
|
149
|
|
|
|
189
|
|
All other
|
|
|
5
|
|
|
|
15
|
|
|
|
67
|
|
|
|
52
|
|
|
|
|
132
|
|
|
|
357
|
|
|
|
424
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
7,735
|
|
|
$
|
7,592
|
|
|
$
|
14,519
|
|
|
$
|
13,909
|
|
Net sales, income (loss)
from continuing operations before provision for income taxes and other related segment information for the three months ended April
30, 2016 and 2015 are as follows (in thousands):
|
|
RF Connector
|
|
|
Custom Cabling
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Manufacturing and
|
|
|
|
|
|
|
|
2016
|
|
Cable Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
Net sales
|
|
$
|
2,079
|
|
|
$
|
5,656
|
|
|
$
|
-
|
|
|
$
|
7,735
|
|
Income (loss) from continuing operations before provision (benefit) for income
taxes
|
|
|
(250
|
)
|
|
|
172
|
|
|
|
28
|
|
|
|
(50
|
)
|
Depreciation and amortization
|
|
|
51
|
|
|
|
211
|
|
|
|
-
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,339
|
|
|
$
|
4,253
|
|
|
$
|
-
|
|
|
|
7,592
|
|
Income from continuing operations before provision for income taxes
|
|
|
459
|
|
|
|
145
|
|
|
|
10
|
|
|
|
614
|
|
Depreciation and amortization
|
|
|
41
|
|
|
|
153
|
|
|
|
-
|
|
|
|
194
|
|
Net sales, income (loss)
from continuing operations before provision for income taxes and other related segment information for the six months ended April
30, 2016 and 2015 are as follows (in thousands):
|
|
RF Connector
|
|
|
Custom Cabling
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Manufacturing and
|
|
|
|
|
|
|
|
2016
|
|
Cable Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
Net sales
|
|
$
|
4,036
|
|
|
$
|
10,483
|
|
|
$
|
-
|
|
|
$
|
14,519
|
|
Income (loss) from continuing operations before provision (benefit) for income
taxes
|
|
|
(664
|
)
|
|
|
15
|
|
|
|
28
|
|
|
|
(621
|
)
|
Depreciation and amortization
|
|
|
97
|
|
|
|
431
|
|
|
|
-
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,040
|
|
|
$
|
7,869
|
|
|
$
|
-
|
|
|
$
|
13,909
|
|
Income from continuing operations before provision for income taxes
|
|
|
377
|
|
|
|
69
|
|
|
|
15
|
|
|
|
461
|
|
Depreciation and amortization
|
|
|
92
|
|
|
|
297
|
|
|
|
-
|
|
|
|
389
|
|
Note 11 - Income tax provision
The Company uses an estimated annual effective
tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various
jurisdictions in which the Company operates, 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 238% and 41% of income (loss) before income taxes for the three months ended April 30, 2016 and 2015, respectively, and 60%
and 34% of income (loss) from before income taxes for the six months ended April 30, 2016 and 2015, respectively. The change in
the effective income tax rate from period to period was primarily driven by an increase in the ratio of book-tax differences which
have a rate impact compared to forecasted book income for the year.
The Company recorded income from discontinued
operations, net of tax, as disclosed in Note 3. The total amount of unrecognized tax benefits was $0 as of April 30, 2016 and October
31, 2015.
The total balance of accrued interest and
penalties related to uncertain tax positions was $0 as of April 30, 2016 and October 31, 2015. The Company recognizes interest
and penalties related to uncertain tax positions, if any, as a component of income tax expense, and the accrued interest and penalties,
if any, are included in deferred and other long-term liabilities in the Company's condensed consolidated balance sheets. There
were no material interest or penalties included in income tax expense for the three months ended April 30, 2016.
Note 12 - Intangible assets
Intangible assets consist of the following
(in thousands):
|
|
April 30, 2016
|
|
|
October 31, 2015
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Non-compete agreements (estimated lives 3 - 5 years)
|
|
$
|
310
|
|
|
$
|
310
|
|
Accumulated amortization
|
|
|
(250
|
)
|
|
|
(212
|
)
|
|
|
|
60
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (estimated lives 7 - 15 years)
|
|
|
5,099
|
|
|
|
5,099
|
|
Accumulated amortization
|
|
|
(1,373
|
)
|
|
|
(1,101
|
)
|
|
|
|
3,726
|
|
|
|
3,998
|
|
|
|
|
|
|
|
|
|
|
Backlog (estimated life 1 year)
|
|
|
134
|
|
|
|
134
|
|
Accumulated amortization
|
|
|
(129
|
)
|
|
|
(100
|
)
|
|
|
|
5
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Patents (estimated life 14 years)
|
|
|
142
|
|
|
|
142
|
|
Accumulated amortization
|
|
|
(9
|
)
|
|
|
(4
|
)
|
|
|
|
133
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,924
|
|
|
$
|
4,268
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
1,387
|
|
|
$
|
1,387
|
|
Note 13 -
Accrued expenses
Accrued expenses consist
of the following (in thousands):
|
|
April 30, 2016
|
|
|
October 31, 2015
|
|
|
|
|
|
|
|
|
Wages payable
|
|
$
|
743
|
|
|
$
|
978
|
|
Accrued receipts
|
|
|
525
|
|
|
|
438
|
|
Earn-out liability
|
|
|
594
|
|
|
|
1,150
|
|
Other current liabilities
|
|
|
304
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,166
|
|
|
$
|
2,868
|
|
Accrued receipts represent purchased inventory
for which invoices have not been received.
Non-current portion of earn-out liability
of $377,000 is recorded in other long-term liabilities.
Note 14 - Line of credit
In May 2015, the Company entered into an
amended agreement for a line of credit (“LOC”) in the amount of $5.0 million. Amounts outstanding under the LOC shall
bear interest at a rate of 3.0% plus LIBOR (“base interest rate”), with interest payable on the last day of each month.
All principal outstanding under the LOC which is not bearing interest at a base interest rate shall bear interest at Union Bank’s
Reference Rate, as defined, which rate shall vary. Borrowings under the LOC are secured by a security interest in certain assets
of the Company. The LOC contains certain loan covenants as described in the agreement. Failure to maintain the loan covenants shall
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 May 30, 2017. As of April 30, 2016, no amounts were outstanding under
the LOC.
Note 15 - Commitments
In April 2014, the Company amended its lease
for its facility in San Diego, California, extending the term of the lease and reducing its square footage. The amended lease expires
in March 2017 and requires minimum annual rental payments (starting at approximately $19,000 per month) that are subject to fixed
annual increases. The minimum annual rentals under this lease are being charged to expense on a straight-line basis over the lease
term. The San Diego lease also requires the payment of the Company’s pro rata share of real estate taxes and insurance, maintenance
and other operating expenses related to the facilities. As of April 30, 2016, the aggregate remaining minimum lease payments under
this lease totaled $221,000.
The Cables Unlimited division leases an
approximately 12,000 square foot facility located in Yaphank, New York. In April 2016, the lease for this was extended until June
30, 2017. Cables Unlimited’s monthly rent expense under the lease is $13,000 per month, plus payments of all utilities, janitorial
expenses, routine maintenance costs and costs of insurance for Cables Unlimited’s business operations and equipment. The
landlord is a company controlled by Darren Clark, the former owner of Cables Unlimited and a current director of the Company.
In March 2015, the Company amended its lease
for its approximately 4,500 square foot facility located in Las Vegas, Nevada to extend the term of the lease to April 2016. The
Las Vegas facility was used by the Company’s Aviel Electronics division. Aviel’s monthly rent expense under the lease
was $4,270 per month. As a result of the sale of Aviel as of December 22, 2015, the Company has no further commitment.
The newly acquired Comnet Telecom division
leases approximately 15,000 square feet in two suites located in East Brunswick, New Jersey. Comnet’s monthly rent expense
under the leases is approximately $11,655 per month for these facilities which expire in September 2017.
The newly acquired Rel-Tech Electronic division
leases approximately 13,750 square feet located in Milford, Connecticut. Rel-Tech’s net monthly rent expense under the lease
is approximately $8,307 per month for these facilities which expires in August 2017.
Note 16 - Cash dividend and declared
dividends
The Company paid dividends
of $0.02 per share during the three months ended April 30, 2016 for a total of $177,000 and $0.07 per share during the three months
ended April 30, 2015 for a total of $596,000. The Company paid dividends of $0.02 and $0.07 per share during the six months ended
April 30, 2016 for a total of $787,000 and $0.07 per share during the six months ended April 30, 2015 for a total of $1.2 million.
Note 17 - Subsequent events
At its June 8, 2016
meeting, the Board of Directors of the Company declared a quarterly cash dividend of $0.02 per share to be paid on July 15, 2016
to stockholders of record on June 30, 2016.