NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting
policies
Business activities
RF Industries, Ltd., together with its three
wholly-owned subsidiaries (collectively, hereinafter the “Company”), primarily engages in the design, manufacture,
and marketing of interconnect products and systems, including coaxial and specialty cables, fiber optic cables and connectors,
and electrical and electronic specialty cables. For internal operating and reporting purposes, and for marketing purposes, as of
the end of the fiscal year ended October 31, 2016 the Company classified its operations into the following four divisions/subsidiaries:
(i) The Connector and Cable Assembly Division designs, manufactures and distributes coaxial connectors and cable assemblies that
are integrated with coaxial connectors; (ii) Cables Unlimited, Inc., the subsidiary that manufactures custom and standard cable
assemblies, complex hybrid fiber optic power solution cables, adapters, and electromechanical wiring harnesses for communication,
computer, LAN, automotive and medical equipment; (iii) Comnet Telecom Supply, Inc., the subsidiary that manufactures and sells
fiber optics cable, distinctive cabling technologies and custom patch cord assemblies, as well as other data center products; and
(iv) the recently acquired Rel-Tech Electronics, Inc., the subsidiary that designs and manufacturers of cable assemblies and wiring
harnesses for blue chip industrial, oilfield, instrumentation and military customers. Both the Cables Unlimited division and the
Comnet Telecom division are Corning Cables Systems CAH Connections SM Gold Program members that are authorized to manufacture fiber
optic cable assemblies that are backed by Corning Cables Systems’ extended warranty. During the fiscal year ended October
31, 2016, RF Industries, Ltd. sold the Aviel Electronics Division that designed, manufactured and distributed specialty and custom
RF connectors, and discontinued the Bioconnect Division that manufactured and distributed cabling and interconnect products to
the medical monitoring market.
Use of estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures. Actual results may differ from those estimates.
Principles of consolidation
The accompanying
consolidated financial statements for the year ended 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 consolidated financial statements for the year ended October 31, 2016
include the accounts of RF Industries, Ltd., Cables Unlimited, Comnet and Rel-Tech
(collectively
the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in
the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These
reclassifications had no effect on reported consolidated net income.
Cash equivalents
The Company considers all highly-liquid
investments with an original maturity of three months or less when purchased to be cash equivalents.
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 for shipments with terms of FOB Shipping
Point, revenue is recognized upon shipment, for shipments with terms of FOB Destination, revenue is recognized upon delivery
and revenue from services is recognized when services are performed, and the recovery of the consideration is considered
probable.
Inventories
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 requires significant judgment.
In June 2015, the Company acquired Rel-Tech,
a company that valued its inventories using specific identification (last purchase price) on a FIFO basis. As of July 31, 2016,
Rel-Tech values its inventories cost using the weighted average cost of accounting.
Property and equipment
Equipment, tooling and furniture are recorded
at cost and depreciated over their estimated useful lives (generally 3 to 5 years) using the straight-line method. Expenditures
for repairs and maintenance are charged to operations in the period incurred.
Goodwill
Goodwill is recorded when the purchase
price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired.
Goodwill is not amortized, but is subject to impairment analysis at least once annually, which the Company performs in
October or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s
carrying amount is greater than its fair value.
We assess whether a goodwill impairment
exists using both qualitative and quantitative assessments. Our qualitative assessment involves determining whether events or circumstances
exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill. If based on this qualitative assessment we determine it is not more likely than not that the fair value of a reporting
unit is less than its carrying amount, we will not perform a quantitative assessment.
If the qualitative assessment indicates
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if we elect not to
perform a qualitative assessment, we perform a quantitative assessment, or two-step impairment test, to determine whether a goodwill
impairment exists at the reporting unit. The first step in our quantitative assessment identifies potential impairments by comparing
the estimated fair value of the reporting unit to its carrying value, including goodwill (“Step 1”). If the carrying
value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure
the amount of impairment (“Step 2”).
For the fiscal year 2016, Cables Unlimited
did not meet its sales volume and revenue goals, and the mix of product sold had lower margins than planned. These results, along
with changes in the competitive marketplace and an evaluation of business priorities, led to a shift in strategic direction and
reduced future revenue and profitability expectations for the business. The results of these changes and circumstances lead to
the determination that Cables Unlimited did not pass our qualitative assessment and therefore a quantitative assessment was required.
Upon completion of our Step 1 test, we found
that the results indicated that Cables Unlimited’s carrying value exceeded its estimated fair value, and as a result, the
Step 2 test was performed specific to Cables Unlimited. Under Step 2, the fair value of all assets and liabilities were
estimated, including customer list and backlog, for the purpose of deriving an estimate of the fair value of goodwill. The fair
value of the goodwill was then compared to the recorded goodwill to determine the amount of the impairment. Assumptions used in
measuring the value of these assets and liabilities included the discount rates used in valuing the intangible assets, and consideration
of the market environment in valuing the tangible assets.
Upon completion of our Step 2 test, our
Cables Unlimited division’s goodwill was determined to be impaired. As of October 31, 2016, the Company recorded a $2.6 million
impairment charge to goodwill. Cables Unlimited’s goodwill is included in the Custom Cabling Manufacturing and Assembly segment.
No other instances
of impairment were identified as of October 31, 2016 and no instances of goodwill impairment were identified as of October 31, 2015.
On June 15, 2011, the Company completed
its acquisition of Cables Unlimited. Goodwill related to this acquisition is included within the Cables Unlimited reporting unit.
Effective November 1, 2014, the Company also completed its acquisition of Comnet. Goodwill related to this acquisition is included
within the Comnet reporting unit. As of May 19, 2015, the Company completed its acquisition of the CompPro product line. Goodwill
related to this acquisition is included within the Connector and Cable Assembly Division. Effective June 1, 2015, the Company completed
its acquisition of Rel-Tech. Goodwill related to this acquisition is included within the Rel-Tech reporting unit.
Long-lived assets
The Company assesses 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.
The Company measures recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the
assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment
to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. The Company has made
no material adjustments to our long-lived assets in any of the years presented.
The Company amortizes its intangible assets
with definite useful lives over their estimated useful lives and reviews these assets for impairment.
In addition, the Company tests our trademarks
and indefinite-lived asset for impairment at least annually or more frequently if events or changes in circumstances indicate that
these assets may be impaired.
Upon completion of our Step 2
test (see “Goodwill” above), our Cables Unlimited division’s trademark was determined to be impaired. As of
October 31, 2016, the Company recorded a $150,000 impairment charge to its trademark. Cables Unlimited’s trademark is
included in the Custom Cabling Manufacturing and Assembly segment.
No other instances
of impairment were identified as of October 31, 2016 and no instances of impairment were identified as of October 31, 2015.
Earn-out liability
The purchase agreements for the Comnet and
Rel-Tech acquisitions provide for earn-out payments of up to $1,360,000 and $800,000, respectively. The initial earn-out
liability was valued at its fair value using the Monte Carlo simulation and is included as a component of the total purchase
price. The earn-outs were and will continue to be revalued quarterly using a present value approach and any resulting increase
or decrease will be recorded into selling and general expenses. Any changes in the assumed timing and amount of the probability
of payment scenarios could impact the fair value. Significant judgment is employed in determining the appropriateness of the assumptions
used in calculating the fair value of the earn-out as of the acquisition date. Accordingly, significant variances between actual
and forecasted results or changes in the assumptions can materially impact the amount of contingent consideration expense we record
in future periods. The Comnet and Rel-Tech acquisitions are more fully described in Note 2.
Intangible assets
Intangible assets consist of the following
as of October 31 (in thousands):
|
|
2016
|
|
|
2015
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Non-compete agreements (estimated lives 3 - 5 years)
|
|
$
|
310
|
|
|
$
|
310
|
|
Accumulated amortization
|
|
|
(273
|
)
|
|
|
(212
|
)
|
|
|
|
37
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (estimated lives 7 - 15 years)
|
|
|
5,099
|
|
|
|
5,099
|
|
Accumulated amortization
|
|
|
(1,644
|
)
|
|
|
(1,101
|
)
|
|
|
|
3,455
|
|
|
|
3,998
|
|
|
|
|
|
|
|
|
|
|
Backlog (estimated life 1 year)
|
|
|
134
|
|
|
|
134
|
|
Accumulated amortization
|
|
|
(134
|
)
|
|
|
(100
|
)
|
|
|
|
-
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Patents (estimated life 14 years)
|
|
|
142
|
|
|
|
142
|
|
Accumulated amortization
|
|
|
(15
|
)
|
|
|
(4
|
)
|
|
|
|
127
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,619
|
|
|
$
|
4,268
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
1,237
|
|
|
$
|
1,387
|
|
Amortization expense
for the years ended October 31, 2016 and 2015 was $649,000 and $598,000, respectively.
Impairment to trademarks
for the years ended October 31, 2016 and 2015 was $150,000 and $0, respectively.
Estimated amortization
expense related to finite lived intangible assets is as follows (in thousands):
Year ending
|
|
|
|
October 31,
|
|
Amount
|
|
|
|
|
|
2017
|
|
$
|
589
|
|
2018
|
|
|
553
|
|
2019
|
|
|
553
|
|
2020
|
|
|
553
|
|
2021
|
|
|
413
|
|
Thereafter
|
|
|
958
|
|
Total
|
|
$
|
3,619
|
|
Advertising
The Company expenses the cost of advertising
and promotions as incurred. Advertising costs charged to operations were approximately $156,000 and $152,000 in 2016 and 2015,
respectively.
Research and development
Research and development costs are expensed
as incurred. The Company’s research and development expenses relate to its engineering activities, which consist of the design
and development of new products for specific customers, as well as the design and engineering of new or redesigned products for
the industry in general. During the years ended October 31, 2016 and 2015, the Company recognized $747,000 and $775,000 in engineering
expenses, respectively.
Income taxes
The Company accounts for income taxes under
the asset and liability method, based on the income tax laws and rates in the jurisdictions in which operations are conducted and
income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Developing the provision (benefit)
for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and
strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that
may be required for deferred tax assets. Valuation allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Management’s judgments and tax strategies are subject to audit by various taxing authorities.
The Company recognizes accrued interest
and penalties related to unrecognized tax benefits as a component of income tax expense.
Stock options
For stock option grants to employees, the
Company recognizes compensation expense based on the estimated fair value of the options at the date of grant. Stock-based employee
compensation expense is recognized on a straight-line basis over the requisite service period. The Company issues previously unissued
common shares upon the exercise of stock options.
For the fiscal years ended October 31, 2016
and 2015, charges related to stock-based compensation amounted to approximately $206,000 and $232,000, respectively. For the fiscal
years ended October 31, 2016 and 2015, stock-based compensation classified in cost of sales amounted to $28,000 and $53,000 and
stock-based compensation classified in selling and general and engineering expense amounted to $178,000 and $179,000, respectively.
Earnings (loss) per share
Basic earnings (loss) per share is calculated
by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during
the period. The calculation of diluted earnings (loss) per share is similar to that of basic earnings (loss) per share, except
that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially
dilutive common shares, principally those issuable upon the exercise of stock options, were issued and the treasury stock method
had been applied during the period. The greatest number of shares potentially issuable by the Company upon the exercise of stock
options in any period for the years ended October 31, 2016 and 2015, that were not included in the computation because they were
anti-dilutive, totaled 824,441 and 792,386, respectively.
The following table summarizes the computation
of basic and diluted earnings (loss) per share:
|
|
2016
|
|
|
2015
|
|
Numerators:
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) (A)
|
|
$
|
(4,089,000
|
)
|
|
$
|
994,000
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings (loss) per share (B)
|
|
|
8,786,510
|
|
|
|
8,494,111
|
|
Add effects of potentially dilutive securities - assumed exercise of stock options
|
|
|
-
|
|
|
|
368,106
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings (loss) per share (C)
|
|
|
8,786,510
|
|
|
|
8,862,217
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share (A)/(B)
|
|
$
|
(0.47
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share (A)/(C)
|
|
$
|
(0.47
|
)
|
|
$
|
0.11
|
|
Recent accounting standards
In August 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Classification of Certain
Cash Receipts and Cash Payments. The new standard will change the classification of certain cash payments and receipts within the
cash flow statement. Specifically, payments for debt prepayment or debt extinguishment costs, including third-party costs, premiums
paid, and other fees paid to lenders that are directly related to the debt prepayment or debt extinguishment, excluding accrued
interest, will now be classified as financing activities. Previously, these payments were classified as operating expenses. The
guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after
December 15, 2019, with early adoption permitted, and will be applied retrospectively. The Company does not expect that the adoption
of this new standard will have a material impact on its Consolidated Financial Statements.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02, Leases. This ASU requires lessees to recognize most leases on their balance sheets related to the
rights and obligations created by those leases. The ASU also requires additional qualitative and quantitative disclosures related
to the nature, timing and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating
the impact the adoption of this new standard will have on its Consolidated Financial Statements.
In March 2016, the FASB issued Accounting
Standards Update No. 2016-09, Compensation – Stock Compensation. The new standard will modify several aspects of the accounting
and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements
of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for
award forfeitures over the vesting period. The new standard is effective for fiscal years beginning after December 15, 2016 and
interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption
of this new standard will have on its Consolidated Financial Statements.
In November 2015, the FASB issued Accounting
Standards Update No. 2015-17, Income Taxes. Current GAAP requires an entity to separate deferred income tax liabilities and assets
into current and noncurrent amounts in a classified balance sheet. The new standard simplifies the presentation of deferred tax
assets and liabilities and requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance
sheet. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, with early adoption
permitted. This ASU affected our disclosures relating to deferred tax assets and liabilities. The Company has applied this guidance
prospectively and it did not have a material impact on the consolidated balance sheets.
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09, Revenue from Contracts with Customers. This guidance will supersede Topic 605, Revenue Recognition,
in addition to other industry-specific guidance, once effective. The new standard requires a company to recognize revenue in a
manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date, as a revision to ASU 2014-09, which revised the effective
date to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but
not prior to periods beginning after December 15, 2016 (i.e., the original adoption date per ASU 2014-09). In March 2016, the FASB
issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies certain aspects
of the principal-versus-agent guidance, including how an entity should identify the unit of accounting for the principal versus
agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions.
The amendments also reframe the indicators to focus on evidence that an entity is acting as a principal rather than as an agent.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,
which clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will
determine whether it recognizes revenue over time or at a point in time. The amendments also clarify when a promised good or service
is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial
in the context of a contract. The Company does not expect that the adoption of this new standard will have a material impact on
its Consolidated Financial Statements.
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 consolidated results of operations.
All costs related to the acquisition of Rel-Tech have been expensed as incurred. For the periods ended October 31, 2016 and 2015,
Rel-Tech contributed $6.8 million and $3.1 million of revenue, respectively.
The Company recognized
a $154,000 charge to selling and general expenses as a result of the revaluation of the earn-out liability as it relates to the
acquisition of Rel-Tech as of October 31, 2016. As of October 31, 2016, the Company has accrued $450,000 in earn-out accrual, of
which $322,000 is in current liabilities and $128,000 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:
|
|
October 31,
|
|
|
|
2015
|
|
|
|
|
|
Revenue
|
|
$
|
34,714,000
|
|
Net income
|
|
|
958,000
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
Diluted
|
|
$
|
0.11
|
|
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 seven to fourteen 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 operations 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 has acted as the President of Comnet. Under the employment agreement,
which expired on January 20, 2017, Mr. Portera received a base salary of $210,000 per year. Under the employment agreement, Mr.
Portera was 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 $4,150,000
(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 periods ended October 31, 2016 and 2015,
Comnet contributed $9.1 million and $10.3 million of revenue, respectively.
The Company recognized
a $56,000 and $318,000 credit to selling and general expenses as a result of the revaluation of the earn-out liability as it relates
to the acquisition of Comnet as of October 31, 2016 and 2015, respectively. As of October 31, 2016, the Company has accrued $385,000
in earn-out accrual, which is included 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 years ended October 31, 2016 and 2015, the Company recognized
approximately $57,000 and $93,000, respectively, of aggregate royalty income for RF Neulink and RadioMobile, 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 year ended October 31, 2016, the Company recognized approximately $148,000 of loss
for the Bioconnect division, which amounts have been included within discontinued operations. Included in the fiscal year 2016
loss, the Company recognized a $148,000 pretax write-down on Bioconnect division’s inventory and fixed assets. For the year
ended October 31, 2015, the Company recognized approximately $419,000 of income for the Bioconnect division.
The following summarized financial information
related to the RF Neulink, RadioMobile and Bioconnect divisions is segregated from continuing operations and reported as discontinued
operations for the years ended October 31, 2016 and 2015 (in thousands):
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
57
|
|
|
$
|
93
|
|
Bioconnect
|
|
|
(148
|
)
|
|
|
419
|
|
Provision (benefit) for income taxes
|
|
|
(33
|
)
|
|
|
212
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
(58
|
)
|
|
$
|
300
|
|
Note 4 - 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 October 31, 2016, the Company
had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $3.9 million.
One customer accounted for
approximately 15% and 18% of the Company’s net sales for the fiscal year ended October 31, 2016 and 2015, respectively.
At October 31, 2016 and 2015, this customer’s accounts receivable balance accounted for approximately 20% and 17%,
respectively, of the Company’s total net accounts receivable balances. Although this customer has been an
on-going 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.
There was no product line that was significant
for the fiscal years ended October 31, 2016 and 2015.
Note 5 - Inventories and major vendors
Inventories,
consisting of materials, labor and manufacturing overhead, are stated at the lower of cost or market. Cost has been determined
using the weighted average cost method. In June 2015, the Company acquired Rel-Tech, a company that valued its inventories
using specific identification (last purchase price) on a FIFO basis. As of July 31, 2016, Rel-Tech values its inventory cost using
the weighted average cost of accounting. Inventories consist of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
2,642
|
|
|
$
|
2,671
|
|
Work in process
|
|
|
279
|
|
|
|
270
|
|
Finished goods
|
|
|
3,101
|
|
|
|
3,987
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,022
|
|
|
$
|
6,928
|
|
Purchases of inventory
from two major vendors during fiscal 2016 represented 9% and 6%, respectively, of total inventory purchases compared to two major
vendors who represented 12% and 8%, respectively, of total inventory purchases in fiscal 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):
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Prepaid taxes
|
|
$
|
871
|
|
|
$
|
408
|
|
Prepaid expense
|
|
|
347
|
|
|
|
140
|
|
Notes receivable, current portion
|
|
|
83
|
|
|
|
-
|
|
Other
|
|
|
135
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,436
|
|
|
$
|
728
|
|
Long-term portion of notes receivable of
$104,000 is recorded in other assets as of October 31, 2016.
Note 7 - Accrued expenses and other
long-term liabilities
Accrued expenses consist
of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Wages payable
|
|
$
|
941
|
|
|
$
|
978
|
|
Accrued receipts
|
|
|
578
|
|
|
|
438
|
|
Earn-out liability
|
|
|
707
|
|
|
|
1,150
|
|
Other current liabilities
|
|
|
544
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,770
|
|
|
$
|
2,868
|
|
Accrued receipts represent
purchased inventory for which invoices have not been received.
Non-current portion
of earn-out liability of $128,000 is recorded in other long-term liabilities as of October 31, 2016.
Note 8 - 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; and (5) if applicable, the nature of the regulatory environment. As
of October 31, 2016, the Company had two segments - RF Connector and Cable Assembly and Custom Cabling Manufacturing based upon
this evaluation.
The RF Connector and Cable Assembly segment
is comprised of one division, while the Custom Cabling Manufacturing and Assembly segment comprised of three divisions. The
four divisions that met the quantitative thresholds for segment reporting are Connector and Cable Assembly, Cables Unlimited, Comnet
and Rel-Tech. 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
Connector and Cable Assembly division constitutes the RF Connector and Cable Assembly segment , the Cables Unlimited, Comnet and
Rel-Tech division constitutes 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 years ended October 31, 2016 and 2015 (in thousands):
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
29,257
|
|
|
$
|
29,732
|
|
Foreign Countries:
|
|
|
|
|
|
|
|
|
Canada
|
|
|
509
|
|
|
|
362
|
|
Israel
|
|
|
63
|
|
|
|
296
|
|
Mexico
|
|
|
234
|
|
|
|
395
|
|
All Other
|
|
|
178
|
|
|
|
123
|
|
|
|
|
984
|
|
|
|
1,176
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
30,241
|
|
|
$
|
30,908
|
|
Net sales, income (loss) from continuing
operations before provision (benefit) for income taxes and other related segment information for the years ended October 31, 2016
and 2015 are as follows (in thousands):
|
|
RF Connector
|
|
|
Custom Cabling
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Manufacturing and
|
|
|
|
|
|
|
|
|
|
Cable Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
9,352
|
|
|
$
|
20,889
|
|
|
$
|
-
|
|
|
$
|
30,241
|
|
Loss from continuing operations before provision (benefit) for income taxes
|
|
|
(1,358
|
)
|
|
|
(3,232
|
)
|
|
|
(93
|
)
|
|
|
(4,683
|
)
|
Depreciation and amortization
|
|
|
194
|
|
|
|
842
|
|
|
|
-
|
|
|
|
1,036
|
|
Total assets
|
|
|
5,902
|
|
|
|
13,100
|
|
|
|
6,835
|
|
|
|
25,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
11,710
|
|
|
$
|
19,198
|
|
|
$
|
-
|
|
|
$
|
30,908
|
|
Income (loss) from continuing operations before provision (benefit) for income taxes
|
|
|
711
|
|
|
|
(234
|
)
|
|
|
357
|
|
|
|
834
|
|
Depreciation and amortization
|
|
|
201
|
|
|
|
795
|
|
|
|
-
|
|
|
|
996
|
|
Total assets
|
|
|
7,248
|
|
|
|
16,150
|
|
|
|
8,854
|
|
|
|
32,252
|
|
Note 9 - Income tax provision
The provision (benefit) for income taxes
for the fiscal years ended October 31, 2016 and 2015 consists of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(332
|
)
|
|
$
|
300
|
|
State
|
|
|
(13
|
)
|
|
|
4
|
|
|
|
|
(345
|
)
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(179
|
)
|
|
|
(126
|
)
|
State
|
|
|
(128
|
)
|
|
|
(38
|
)
|
|
|
|
(307
|
)
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(652
|
)
|
|
$
|
140
|
|
Income tax at the federal statutory rate
is reconciled to the Company’s actual net provision (benefit) for income taxes as follows (in thousands, except percentages):
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
%
of Pretax
|
|
|
|
|
|
%
of Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes at federal statutory rate
|
|
$
|
(1,592
|
)
|
|
|
34.0
|
%
|
|
$
|
287
|
|
|
|
34.0
|
%
|
State
tax provision, net of federal tax benefit
|
|
|
(53
|
)
|
|
|
1.1
|
%
|
|
|
38
|
|
|
|
4.5
|
%
|
Nondeductible
differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and other intangible asset impairment
|
|
|
916
|
|
|
|
-19.6
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Rel-Tech
earn-out
|
|
|
52
|
|
|
|
-1.1
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Qualified
domestic production activities deduction
|
|
|
46
|
|
|
|
-1.0
|
%
|
|
|
(36
|
)
|
|
|
-4.3
|
%
|
ISO
stock options
|
|
|
43
|
|
|
|
-0.9
|
%
|
|
|
50
|
|
|
|
6.0
|
%
|
Meals
and entertainment
|
|
|
29
|
|
|
|
-0.6
|
%
|
|
|
31
|
|
|
|
3.7
|
%
|
Comnet
book income
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(46
|
)
|
|
|
-5.5
|
%
|
Transaction
costs
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
28
|
|
|
|
3.4
|
%
|
Temporary
true-ups
|
|
|
(3
|
)
|
|
|
0.1
|
%
|
|
|
(89
|
)
|
|
|
-10.6
|
%
|
State
tax refunds, net of federal expense
|
|
|
(38
|
)
|
|
|
0.8
|
%
|
|
|
(66
|
)
|
|
|
-7.9
|
%
|
R&D
credits
|
|
|
(46
|
)
|
|
|
1.0
|
%
|
|
|
(44
|
)
|
|
|
-5.2
|
%
|
Other
|
|
|
(6
|
)
|
|
|
0.1
|
%
|
|
|
(13
|
)
|
|
|
-1.3
|
%
|
|
|
$
|
(652
|
)
|
|
|
13.9
|
%
|
|
$
|
140
|
|
|
|
16.8
|
%
|
The Company’s total deferred tax assets
and deferred tax liabilities at October 31, 2016 and 2015 are as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Reserves
|
|
$
|
216
|
|
|
$
|
171
|
|
Accrued vacation
|
|
|
134
|
|
|
|
143
|
|
Stock-based compensation awards
|
|
|
159
|
|
|
|
-
|
|
Uniform capitalization
|
|
|
148
|
|
|
|
97
|
|
Other
|
|
|
43
|
|
|
|
15
|
|
Total deferred tax assets
|
|
|
700
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Stock-based compensation awards
|
|
|
-
|
|
|
|
136
|
|
Amortization / intangible assets
|
|
|
(864
|
)
|
|
|
(1,036
|
)
|
Depreciation / equipment and furnishings
|
|
|
(211
|
)
|
|
|
(247
|
)
|
Other
|
|
|
(34
|
)
|
|
|
4
|
|
Total deferred tax liabilities
|
|
|
(1,109
|
)
|
|
|
(1,143
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets (liabilities)
|
|
$
|
(409
|
)
|
|
$
|
(717
|
)
|
Deferred income tax assets and liabilities
are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable
or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected
to be realized. The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets, including
the amount and timing of future taxable income, and has determined it is more likely than not that the assets will be realized
in future tax years.
The Company had adopted the provisions of
ASC 740-10, which clarifies the accounting for uncertain tax positions. ASC 740-10 requires that the Company recognize the impact
of a tax position in the financial statements if the position is not more likely than not to be sustained upon examination based
on the technical merits of the position. The Company’s practice is to recognize interest and penalties related to income
tax matters in income from continuing operations. The Company has no material unrecognized tax benefits as of October 31, 2016.
The Company is subject to taxation in the
United States and state jurisdictions. The Company’s tax years for October 31, 2013 and forward are subject to examination
by the United States and October 31, 2012 and forward with state tax authorities.
In November 2015, the FASB issued Accounting
Standards Update 2015-17 (ASU 2015-17) Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets
and deferred tax liabilities be classified as noncurrent in the balance sheet. ASU 2015-17 is effective for annual periods ending
after December 15, 2017. Early adoption is permitted, and the Company has adopted the provisions of ASU 2015-17 prospectively as
of October 31, 2016 and is not retrospectively adjusting prior periods.
Note 10 - Stock options
Incentive and non-qualified stock option plans
In May 2000, the Board of Directors adopted
the Company’s 2000 Stock Option Plan (the “2000 Option Plan”). Under the 2000 Option Plan, the Company was authorized
to grant options to purchase shares of common stock to officers, directors, key employees and others providing services to the
Company. The 2000 Option Plan expired in May 2010. At the time of expiration, the 2000 Plan had authorized the Company to grant
options to purchase a total of 1,320,000 shares. Upon the expiration of the 2000 Plan, the Company was no longer able to grant
any stock options to its employees, officers and directors. Accordingly, as of October 31, 2016, no shares are available for future
grant under the 2000 Option Plan.
On March 9, 2010, the Company’s Board
of Directors adopted the RF Industries, Ltd. 2010 Stock Incentive Plan (the “2010 Plan”). In June 2010, the Company’s
stockholders approved the 2010 Plan by vote as required by NASDAQ. An aggregate of 1,000,000 shares of common stock was set aside
and reserved for issuance under the 2010 Plan. The Company’s shareholders approved the issuance of an additional 500,000
shares of common stock at its annual meeting held on September 5, 2014 and another 500,000 shares of common stock at its annual
meeting held September 4, 2015. As of October 31, 2016, 914,821 shares of common stock were remaining for future grants of stock
options under the 2010 Plan.
Additional disclosures related to stock option plans
The fair value of each option granted in
2016 and 2015 was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
|
|
2016
|
|
|
2015
|
|
Weighted average volatility
|
|
|
28.7
|
%
|
|
|
52.2
|
%
|
Expected dividends
|
|
|
2.4
|
%
|
|
|
6.7
|
%
|
Expected term (in years)
|
|
|
3.0
|
|
|
|
5.4
|
|
Risk-free interest rate
|
|
|
0.70
|
%
|
|
|
1.17
|
%
|
Weighted average fair value of options granted during the year
|
|
$
|
0.66
|
|
|
$
|
1.09
|
|
Weighted average fair value of options vested during the year
|
|
$
|
4.36
|
|
|
$
|
4.78
|
|
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 2016 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.
Additional information regarding all of
the Company's outstanding stock options at October 31, 2016 and 2015 and changes in outstanding stock options in 2016 and 2015
follows:
|
|
2016
|
|
|
2015
|
|
|
|
Shares or
|
|
|
Weighted
|
|
|
Shares or
|
|
|
Weighted
|
|
|
|
Price Per
|
|
|
Average
|
|
|
Price Per
|
|
|
Average
|
|
|
|
Share
|
|
|
Exercise Price
|
|
|
Share
|
|
|
Exercise Price
|
|
Options outstanding at beginning of year
|
|
|
1,240,100
|
|
|
$
|
3.64
|
|
|
|
1,044,932
|
|
|
$
|
3.27
|
|
Options granted
|
|
|
104,936
|
|
|
$
|
3.36
|
|
|
|
396,039
|
|
|
$
|
4.21
|
|
Options exercised
|
|
|
(180,067
|
)
|
|
$
|
0.27
|
|
|
|
(153,837
|
)
|
|
$
|
2.12
|
|
Options forfeited
|
|
|
(157,118
|
)
|
|
$
|
4.53
|
|
|
|
(47,034
|
)
|
|
$
|
5.11
|
|
Options outstanding at end of year
|
|
|
1,007,851
|
|
|
$
|
4.07
|
|
|
|
1,240,100
|
|
|
$
|
3.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
724,457
|
|
|
$
|
3.93
|
|
|
|
782,648
|
|
|
$
|
3.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at end of year
|
|
|
1,002,522
|
|
|
$
|
4.07
|
|
|
|
1,233,543
|
|
|
$
|
3.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option price range at end of year
|
|
$
|
2.30
- $6.91
|
|
|
|
|
|
|
$
|
0.05 - $6.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of options exercised during year
|
|
$
|
456,000
|
|
|
|
|
|
|
$
|
363,000
|
|
|
|
|
|
Weighted average remaining contractual life of options outstanding
as of October 31, 2016: 4.51 years
Weighted average remaining contractual life of options exercisable
as of October 31, 2016: 3.25 years
Weighted average remaining contractual life of options vested
and expected to vest as of October 31, 2016: 4.50 years
Aggregate intrinsic value of options outstanding at October
31, 2016: $99,000
Aggregate intrinsic value of options exercisable at October
31, 2016: $99,000
Aggregate intrinsic value of options vested and expected to
vest at October 31, 2016: $99,000
As of October 31, 2016, $396,000 of expense
with respect to nonvested share-based arrangements has yet to be recognized which is expected to be recognized over a weighted
average period of 5.37 years.
For serving on the Board of Directors during
the fiscal year ended October 31, 2016, non-employee directors received an annual fee of $30,000, which amount was 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. For
the year ended October 31, 2016, the Company granted each of its three non-employee directors options to purchase 17,064 shares.
The number of stock option shares 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 a 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 2016 fiscal
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 vested ratably
over fiscal 2016.
Note 11 - Retirement plan
The Company has a 401(K) plan available
to its employees. For the years ended October 31, 2016 and 2015, the Company contributed and recognized as an expense $182,000
and $160,000, respectively, which amount represented 3% of eligible employee earnings under its Safe Harbor Non-elective Employer
Contribution Plan.
Note 12 - Related party transactions
The note receivable from stockholder of
$67,000 at October 31, 2015 was due from a former Chief Executive Officer of the Company, earned interest at 6% per annum (which
interest was payable annually), and had no specific due date. The note was collateralized by property owned by the former Chief
Executive Officer. During fiscal 2016, the former Chief Executive Officer resigned as an employee of the Company and, in connection
with his resignation, was required to repay the foregoing promissory note in full.
On June 15, 2011, the Company purchased
Cables Unlimited, Inc., a New York corporation, from Darren Clark, the sole shareholder of Cables Unlimited, Inc. In connection
with the purchase of Cables Unlimited, the Company entered into a lease for the New York facilities from which Cables Unlimited
conducts its operations. 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. During the fiscal year ended October 31, 2016, the Company paid the landlord a total of $156,000 under the lease.
The owner and landlord of the facility is a company controlled by Darren Clark, the former owner of Cables Unlimited and the current
President of this subsidiary of the Company.
A former director of the Company is an employee
of a public relations firm currently used by the Company. For the fiscal years ended October 31, 2016 and 2015, the Company paid
the firm $25,000 and $41,000, respectively, for services rendered by that firm.
Note 13 - Cash dividend and declared
dividends
The Company paid dividends of $0.02, $0.02,
$0.02 and $0.07 per share during the three months ended October, 31, 2016, July 31, 2016, April 30, 2016 and January 31, 2016,
respectively, for a total of $1.1 million. The Company paid dividends of $0.07 per share during the three months ended October,
31, 2015, July 31, 2015, April 30, 2015 and January 31, 2015 for a total of $2.4 million.
Note 14 - Commitments
As of October 31, 2016, the Company leases
its facilities in San Diego, California, Yaphank, New York, Milford, Connecticut and East Brunswick, New Jersey under non-cancelable
operating leases. Deferred rents, included in accrued expenses and other long-term liabilities, were $3,000 as of October 31, 2016
and $7,000 as of October 31, 2015. The San Diego lease also requires the payment of the Company's pro rata share of the real estate
taxes and insurance, maintenance and other operating expenses related to the facilities.
Rent expense under all operating leases
totaled approximately $628,000 and $685,000 in 2016 and 2015, respectively.
Minimum lease payments under these non-cancelable
operating leases in each of the years subsequent to October 31, 2016 are as follows (in thousands):
Year ending
|
|
|
|
October 31,
|
|
Amount
|
|
|
|
|
|
2017
|
|
$
|
443
|
|
2018
|
|
|
20
|
|
2019
|
|
|
20
|
|
2020
|
|
|
15
|
|
2021
|
|
|
2
|
|
Total
|
|
$
|
500
|
|
Note 15 - Line of credit
From May 2015 until September 2016, the
Company had a $5 million line of credit available to it from its bank. The Company did not use the line of credit and, effective
September 8, 2016, the Company has terminated the line of credit. As of October 31, 2016, no amounts were outstanding under the
line of credit.
Note 16 - Stock repurchase program
During April 2014, the Company announced
that its Board of Directors authorized the repurchase of up to 500,000 shares of its common stock. The share repurchase program
could be suspended or terminated at any time without prior notice. No shares were repurchased during the fiscal year October 31,
2016, and the repurchase program was terminated in September 2016.
Note 17 - Subsequent events
On December 8, 2016, the Board
of Directors of the Company declared a quarterly dividend of $0.02 per share that was paid on January 17, 2017 to
shareholders of record on December 31, 2016.
The lease for the Company’s headquarters
in San Diego, California, was scheduled to expire on March 31, 2017, however on January 26, 2017 the term of the lease was extended
until July 31, 2022, and the rental payments increased $2,596 per month, from $20,125 to $22,721 per month.