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, 2016 has been derived from, and certain
terms used herein are defined in, the audited financial statements of the Company as of October 31, 2016 included in the Company’s
Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2016 that was previously filed with the Securities
and Exchange Commission (“SEC”). Operating results for the three-month period ended January 31, 2017 are not necessarily
indicative of the results that may be expected for the year ending October 31, 2017. The unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Annual
Report on Form 10-K for the year ended October 31, 2016.
Principles of consolidation
The accompanying unaudited condensed consolidated
financial statements include the accounts of RF Industries, Ltd., Cables Unlimited, Inc. (“Cables Unlimited”), Comnet
Telecom Supply, Inc. (“Comnet”), and Rel-Tech Electronics, Inc. (“Rel-Tech”), wholly-owned subsidiaries
of RF Industries, Ltd. 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 loss.
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.
Note 2 - Discontinued operations
For the three months ended January 31, 2017,
the Company recognized approximately $62,000 of royalty income for RadioMobile, which amount has been included within discontinued
operations. For the three months ended January 31, 2016, the Company recognized approximately $2,000 of royalty income for the
RF Neulink division, 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 months ended January 31, 2017, the Company recognized
approximately $10,000 of income from sale of equipment for the Bioconnect division, which has been included
within discontinued operations. For the three months ended January 31, 2016, the Company recognized approximately $40,000
loss for the Bioconnect division, which has been included within discontinued operations.
Note 3 - 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 $83,000 in other assets as of January 31,
2017) 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 for the three months ended January 31, 2016.
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, financial
results from the sale of Aviel Electronics were reported as part of continuing operations.
Note 4 - 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. Inventory carrying value is net of inventory reserves of $534,000 and $500,000 at January 31, 2017 and October 31, 2016,
respectively. Inventories consist of the following (in thousands):
|
|
January 31, 2017
|
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
2,921
|
|
|
$
|
2,642
|
|
Work in process
|
|
|
178
|
|
|
|
279
|
|
Finished goods
|
|
|
3,455
|
|
|
|
3,101
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,554
|
|
|
$
|
6,022
|
|
No vendor accounted for greater than 10% of
inventory purchases for the three months ended January 31, 2017. Purchases of inventory from two major vendors during the three
months ended January 31, 2016 represented 14% and 12% of total inventory purchases. The Company has arrangements with these vendors
to purchase product based on purchase orders periodically issued by the Company.
Note 5 - Other current assets
Other current assets consist of the following
(in thousands):
|
|
January 31, 2017
|
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
Prepaid taxes
|
|
$
|
952
|
|
|
$
|
871
|
|
Prepaid expense
|
|
|
392
|
|
|
|
347
|
|
Notes receivable, current portion
|
|
|
83
|
|
|
|
83
|
|
Other
|
|
|
116
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,543
|
|
|
$
|
1,436
|
|
Long-term portion of notes receivable of $83,000
is recorded in other assets.
Note 6 - 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 (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares
outstanding increased by the effects of assuming that other potentially dilutive securities (such as stock options)
outstanding during the period had been exercised and the treasury stock method had been applied. Potentially dilutive
securities totaling 1,024,188 and 1,138,510 for the three months ended January 31, 2017 and 2016, 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 January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings (loss) per share
|
|
|
8,834,747
|
|
|
|
8,716,712
|
|
|
|
|
|
|
|
|
|
|
Add effects of potentially dilutive securities-assumed exercise of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings (loss) per share
|
|
|
8,834,747
|
|
|
|
8,716,712
|
|
Note 7 - Stock-based compensation and equity transactions
The Company’s current stock incentive
plan provides for the granting of qualified and nonqualified options to the Company’s officers, directors and employees.
The Company satisfies the exercise of options by issuing previously unissued common shares. No options were granted to Company
employees during the three months ended January 31, 2017 and 2016.
Company stock option plans
Descriptions of the Company’s stock option
plans are included in Note 10 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2016. A summary
of the status of the options granted under the Company’s stock option plans as of January 31, 2017 and the changes in options
outstanding during the three months then ended is presented in the table that follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at November 1, 2016
|
|
|
1,007,851
|
|
|
$
|
4.07
|
|
Options granted
|
|
|
309,356
|
|
|
$
|
1.50
|
|
Options canceled or expired
|
|
|
(143,019
|
)
|
|
$
|
3.77
|
|
Options outstanding at January 31, 2017
|
|
|
1,174,188
|
|
|
$
|
3.43
|
|
Options exercisable at January 31, 2017
|
|
|
738,444
|
|
|
$
|
3.71
|
|
Options vested and expected to vest at January 31, 2017
|
|
|
1,172,141
|
|
|
$
|
3.43
|
|
Weighted average remaining contractual life of options outstanding
as of January 31, 2017: 4.36 years
Weighted average remaining contractual life of options exercisable
as of January 31, 2017: 3.46 years
Weighted average remaining contractual life of options vested and
expected to vest as of January 31, 2017: 4.35 years
Aggregate intrinsic value of options outstanding at January 31,
2017: $107,000
Aggregate intrinsic value of options exercisable at January 31,
2017: $84,000
Aggregate intrinsic value of options vested and expected to vest
at January 31, 2017: $107,000
As of January 31, 2017, $359,000 of expense
with respect to nonvested share-based arrangements has yet to be recognized but is expected to be recognized over a weighted average
period of 2.72 years.
Effective for the fiscal year ending October
31, 2017, non-employee directors receive $50,000 annually, which is paid one-half in cash and one-half through the grant
of non-qualified stock options to purchase shares of the Company’s common stock. Previously, for the fiscal year ended October
31, 2016, non-employee directors received $30,000 annually. During the quarter ended January 31, 2017, the Company granted each
of its four non-employee directors 77,339 options. The number of stock options granted to each director was determined by dividing
$25,000 by the fair value of a stock option grant using the Black-Scholes model ($0.32 per share). These options vest ratably over
fiscal year 2017.
Stock option expense
During the three months ended January 31, 2017
and 2016, stock-based compensation expense totaled $51,000 and $52,000, respectively. For the three months ended January 31, 2017
and 2016, stock-based compensation classified in cost of sales amounted to $3,000 and $10,000, respectively, and stock-based compensation
classified in selling and general expense amounted to $48,000 and $42,000, respectively.
Note 8 - 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 January 31, 2017, the Company had cash
and cash equivalent balances in excess of federally insured limits in the amount of approximately $3.8 million.
Two customers accounted for approximately 15%
and 10% of the Company’s net sales for the three-month period ended January 31, 2017. Two customers accounted for approximately
14% and 13% of the Company’s net sales for the three-month period ended January 31, 2016. At January 31, 2017, these customers’
accounts receivable balance accounted for approximately 15% and 13% of the Company’s total net accounts receivable balance.
At January 31, 2016, these customers’ accounts receivable balance accounted for approximately 17% and 15% of the Company’s
total net accounts receivable balance. Although these customers have been on-going major customers of the Company, the written
agreements with these customers do not have any minimum purchase obligations and they could stop buying the Company’s products
at any time and for any reason. A reduction, delay or cancellation of orders from these customers or the loss of these customers
could significantly reduce the Company’s future revenues and profits.
Note 9 - Segment information
The Company aggregates operating divisions into
operating segments that have similar economic characteristics primarily in the following areas: (1) the nature of the product
and services; (2) the nature of the production process; (3) the type or class of customer for their products and services; (4)
the methods used to distribute their products or services; (5) if applicable, the nature of the regulatory environment. As of January
31, 2017, the Company had two segments: 1) RF Connector and Cable Assembly and 2) Custom Cabling Manufacturing and Assembly based
upon this evaluation.
The RF Connector and Cable Assembly segment
consisted of one division and the Custom Cabling Manufacturing and Assembly segment was composed 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, and the Cables Unlimited, Comnet and Rel-Tech
divisions constitute the Custom Cabling Manufacturing and Assembly 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 months ended January 31, 2017 and 2016 (in thousands):
|
|
Three Months Ended January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,536
|
|
|
$
|
6,492
|
|
Foreign Countries:
|
|
|
|
|
|
|
|
|
Canada
|
|
|
46
|
|
|
|
71
|
|
Israel
|
|
|
-
|
|
|
|
62
|
|
Mexico
|
|
|
7
|
|
|
|
97
|
|
All Other
|
|
|
28
|
|
|
|
62
|
|
|
|
|
81
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,617
|
|
|
$
|
6,784
|
|
Net sales, loss from continuing operations before
benefit for income taxes and other related segment information for the three months ended January 31, 2017 and 2016 are as follows
(in thousands):
|
|
RF Connector
|
|
|
Custom Cabling
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Manufacturing and
|
|
|
|
|
|
|
|
|
|
Cable Assembly
|
|
|
Assembly
|
|
|
Corporate
|
|
|
Total
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,535
|
|
|
$
|
4,082
|
|
|
$
|
-
|
|
|
$
|
6,617
|
|
Loss from continuing operations before benefit for income taxes
|
|
|
(18
|
)
|
|
|
(341
|
)
|
|
|
20
|
|
|
|
(339
|
)
|
Depreciation and amortization
|
|
|
47
|
|
|
|
173
|
|
|
|
-
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,956
|
|
|
$
|
4,828
|
|
|
$
|
-
|
|
|
$
|
6,784
|
|
Loss from continuing operations before benefit for income taxes
|
|
|
(453
|
)
|
|
|
(118
|
)
|
|
|
-
|
|
|
|
(571
|
)
|
Depreciation and amortization
|
|
|
52
|
|
|
|
220
|
|
|
|
-
|
|
|
|
272
|
|
Note 10 - Income tax benefit
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 benefit for income taxes was 30% and 45%
of income (loss) before income taxes for the three months ended January 31, 2017 and 2016, respectively. The decrease in the effective
income tax rate from period to period was primarily driven by an increased ratio of book income (loss) to discrete benefits from
R&D credits related to the change in tax law in both periods.
The Company recorded income from discontinued
operations, net of tax, as disclosed in Note 2.
The total amount of unrecognized tax benefits
was $0 as of January 31, 2017 and October 31, 2016. The total balance of accrued interest and penalties related to uncertain tax
positions was $0 as of January 31, 2017 and October 31, 2016. 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 January 31, 2017.
Note 11 - Intangible assets
Intangible assets consist of the following (in
thousands):
|
|
January 31, 2017
|
|
|
October 31, 2016
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Non-compete agreements (estimated lives 3 - 5 years)
|
|
$
|
310
|
|
|
$
|
310
|
|
Accumulated amortization
|
|
|
(283
|
)
|
|
|
(273
|
)
|
|
|
|
27
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (estimated lives 7 - 15 years)
|
|
|
5,099
|
|
|
|
5,099
|
|
Accumulated amortization
|
|
|
(1,779
|
)
|
|
|
(1,644
|
)
|
|
|
|
3,320
|
|
|
|
3,455
|
|
|
|
|
|
|
|
|
|
|
Patents (estimated life 14 years)
|
|
|
142
|
|
|
|
142
|
|
Accumulated amortization
|
|
|
(17
|
)
|
|
|
(15
|
)
|
|
|
|
125
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,472
|
|
|
$
|
3,619
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
1,237
|
|
|
$
|
1,237
|
|
Note 12 - Accrued expenses and other
long-term liabilities
Accrued expenses consist
of the following (in thousands):
|
|
January 31, 2017
|
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
Wages payable
|
|
$
|
613
|
|
|
$
|
941
|
|
Accrued receipts
|
|
|
637
|
|
|
|
578
|
|
Earn-out liability
|
|
|
374
|
|
|
|
707
|
|
Other current liabilities
|
|
|
385
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,009
|
|
|
$
|
2,770
|
|
Accrued receipts represent purchased inventory
for which invoices have not been received.
Non-current portion of
earn-out liability of $88,000 is recorded in other long-term liabilities.
Note 13 - Former 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 terminated the line of credit.
Note 14 - 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, 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. The minimum annual rentals 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 January 31, 2017, the aggregate remaining
minimum lease payments under the expiring lease totaled $40,000.
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.
The 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, and the leases expire in September 2017.
The 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, and the lease expires in August 2017.
Note 15 - Cash dividend and declared dividends
The Company paid dividends
of $0.02 per share during the three months ended January 31, 2017 for a total of $176,000. The Company paid dividends of $0.07
per share during the three months ended January 31, 2016 for a total of $610,000.
Note 16 - Subsequent events
On March 9, 2017, the Board of Directors of
the Company declared a quarterly cash dividend of $0.02 per share to be paid on April 15, 2017 to stockholders of record on March
31, 2017.